Edited version of your private ruling

Authorisation Number: 1012495701118

Ruling

Subject: Employee share scheme - Deferred taxing point

Question 1:

Did the deferred taxing point happen in relation to the first tranche of Employee Shares when they vested in the 2009-10 income year?

Answer:

No.

Question 2:

Did the deferred taxing point happen in relation to the second tranche of Employee Shares when they vested in the 2010-11 income year?

Answer:

No.

Question 3:

Did the deferred taxing point happen in relation to the third tranche of Employee Shares when they vested in the 2011-12 income year?

Answer:

No.

This ruling applies for the following period<s>:

2009-10 income year

2010-11 income year

2011-12 income year

The scheme commences on:

1 June 2009

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

In early 200X, the Taxpayer was invited to participate in their employer company's Senior Executive Share Plan and was offered shares (the Employee Shares) of which the employer contributed the whole of the purchase price.

The terms of the invitation were outlined in an 'Invitation Document'.

The Taxpayer accepted the offer on the offer date.

The issued shares were issued with the following restrictions: (Invitation Document point 3 and 4)

Point 3 - The Shares issued pursuant to this invitation by the Plan Trustee will be restricted and will not be able to be dealt with until the Vesting Conditions have been satisfied.

Point 4 - The Vesting Conditions applicable to you are that the Shares will vest in three equal tranches as to 33 1/3% each after 1 year, 2 years and 3 years from the date of acceptance of this invitation.

The Taxpayer was also provided with an Outline of the Senior Executive Share Plan (Outline).

Points 1.6, 1.7 and 1.8 of the Outline provide further guidance on the restrictions attached to the employee share scheme and in particular point 1.8 states:

Shares will not be able to be dealt with by participants until satisfaction of the vesting condition set out immediately above (being point 1.7). If a participant's employment ceases for any reason then the participant will forfeit any Shares for which the vesting condition is not satisfied at the date of cessation of employment.

The employer's Senior Executive Share Plan Trust Deed (Deed) further establishes the restrictions on dealings with shares in Clause 8 beginning on page 9.

In particular, Clauses 8.6, 8.7 & 8.9 of the Deed deals with mechanism in which participants may withdraw their interests from the Trust.

Clause 8.6 - Subject to Clause 9, at any time after the expiration or the satisfaction of any conditions, the Participant may submit a Notice of Withdrawal of Shares to the Plan Trustee to sell or transfer some or all of the Plan Shares held by the Plan Trustee on behalf of the Participant subject to any administrative guidelines established from time to time.

Clause 8.7 - Where a Notice of Withdrawal of Shares has been submitted by a Participant, the Plan Trustee shall notify the Group Employer accordingly. The Board must then consider, by no later than the next meeting held by the Board, whether to approve the Notice of Withdrawal of Shares. Subject to Clause 9, the Board may only withhold approval if some of the shares included in the Notice of Withdrawal of Shares are subject to Conditions which have not been satisfied and it has not been determined that the Conditions are no longer required to be satisfied. If the Board approves the Notice of Withdrawal of Shares, the Plan Trustee shall, to the extent possible, comply with the terms of the Notice of Withdrawal of Shares.

Clause 8.9 - If Plan Shares held by the Plan Trustee on behalf of a Participant are requested to be transferred under Clause 8.7, upon receipt of all appropriate documentation and fees to effect transfer, the Plan Trustee must transfer the Shares to the Participant within X business days of the date of the Notice of Withdrawal of Shares. The Plan Trustee may require the Participant to reimburse the Plan Trustee in respect of costs relating to the transfer.

The Employee Shares are qualifying shares for the purpose of former section 139CD of the Income Tax Assessment Act 1936 (ITAA 1936).

The Taxpayer did not make an election under section 139E of the ITAA 1936 in respect of the 200X income year.

The Employee Shares have vested in accordance with the vesting schedule meaning that:

· The first tranche of Employee Shares vested in the 200X income year

· The second tranche of Employee Shares vested in the 200Y income year

· The third tranche of Employee Shares vested in the 200Z income year

As at 30 June 20XX, the Taxpayer remained employed as a senior executive with the employer.

As at 30 June 20XX, the Taxpayer had not submitted a Notice of Withdrawal of Shares for the Employee Shares issued in early 200X.

Certain documents were provided with the ruling application and are to be read with and form part of the description of the scheme for the purpose of this ruling.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 83A,

Income Tax (Transitional Provisions) Act 1997 Section 83A-5 and

Income Tax Assessment Act 1936 Division 13A of Part III.

Reasons for decision

Summary

The deferred taxing point did not happen in relation to any of the tranches of Employee Shares when they vested.

Detailed reasoning

Operation of Division 13A of Part III of the ITAA 1936

Division 13A of Part III of the ITAA 1936 applies for the 2008-09 income year to determine:

· whether shares were granted under an employee share scheme

· if so, whether any amount is assessable in the 2008-09 income year, and

· if so, how much is assessable in the 2008-09 income year.

Subsection 139B(1) of the ITAA 1936 provides that any discount a taxpayer receives in relation to a share that he acquires under an employee share scheme is included in his assessable income.

Subsection 139C(1) of the ITAA 1936 provides that a taxpayer acquires a share under an employee share scheme if he acquires it in respect of, or for or in relation directly or indirectly to any employment of his. Subsection 139C(3) of the ITAA 1936 provides that a share is only acquired under an employee share scheme if he acquires it at a discount to its market value.

We have concluded that the Employee Shares were granted to the Taxpayer under an employee share scheme as they clearly form part of the remuneration package and so relate to the employment.

We have also concluded that the shares were granted at a discount because the Taxpayer hasn't paid anything to acquire them.

Subsection 139B(2) of the ITAA 1936 provides that any discount that a taxpayer receives due to the grant of shares under an employee share scheme is included in his assessable income in the year of grant unless the shares are qualifying shares and the taxpayer does not choose to be assessable in the year of grant.

Section 139CD of the ITAA 1936 provides that shares in a company are qualifying shares if six conditions are met. The conditions are:

· The shares are granted under an employee share scheme

· The shares are granted in a company that is the taxpayer's employer, or a holding company of his employer

· The shares are ordinary shares

· At least 75% of the permanent employees of the employer were (or at some earlier time had been) entitled to acquire:

· Shares under this employee share scheme, or

· Shares or rights in the employer (or a holding company of the employer) under another employee share scheme

· The taxpayer does not hold a legal or beneficial interest in more than 5% of the shares in the company, and

· The taxpayer is not in a position to cast or control the casting of more than 5% of the maximum number of votes that might be cast at a general meeting of the company.

You have advised that the Employee Shares are qualifying shares.

A taxpayer could choose to include the discount on qualifying shares and qualifying rights in their assessable income in the year of grant by making an election under section 139E of the ITAA 1936.

The Taxpayer has not elected to be taxed on these Employee Shares in the 200X income year.

Subsection 139B(3) of the ITAA 1936 provides that any discount that a taxpayer receives due to the grant of shares under an employee share scheme is assessable in the year that the cessation time occurs if they are qualifying shares but the taxpayer doesn't choose to be assessable in the year of grant.

Subsection 139CA(2) of the ITAA 1936 defines the cessation time of a share with either selling restrictions or forfeiture conditions as the earliest of:

· The time when the taxpayer disposes of the share

· The later of the time when any selling restrictions end and any forfeiture conditions cease on the share

· The time when the taxpayer's employment with a relevant employer ceases

· 10 years from the date of grant of the share.

None of these occurred before 30 June 200X

Transition to Division 83A of the Income Tax Assessment Act 1997 (ITAA 1997)

Paragraph 83A-5(2)(a) of the Income Tax (Transitional Provisions) Act 1997 (ITTPA) provides that Subdivision 83A-C of the Income Tax Assessment Act 1997 (ITAA 1997) applies where:

· Shares were granted under an employee share scheme before 1 July 2009

· The shares were to be assessable in the year that the cessation time occurs, and

· The cessation time did not occur before 1 July 2009.

Each of these conditions is satisfied.

Operation of Division 83A of the ITAA 1997 in transitional cases

Subsection 83A-110(1) of the ITAA 1997 provides that a taxpayer's assessable income for the year that the deferred taxing point occurs includes the market value (calculated at the deferred taxing point) of shares that were granted to the taxpayer under an employee share scheme reduced by their cost base.

Paragraph 83A-5(4)(b) of the ITTPA ensures that the ESS deferred taxing point is determined using the cessation time from Division 13A of Part III of the ITAA 1936 (see the reference to subsection 139CA of the ITAA 1936 above).

As stated above, subsection 139CA(2) of the ITAA 1936 defines the cessation time of a right as the earliest of:

· The time when the taxpayer disposes of the share

· The later of the time when any selling restrictions end and any forfeiture conditions cease on the share

· The time when the taxpayer's employment with a relevant employer ceases

· 10 years from the date of grant of the share.

The lifting of selling restrictions on qualifying shares granted under an employee share scheme will not constitute a cessation time if forfeiture conditions remain on those shares.

In the Taxpayer's case, the Employee Shares continue to be subject to the forfeiture conditions mentioned in Clause 9 of the Deed while they are held by the Plan Trustee. As a result, the vesting of the shares does not constitute a cessation time.