Edited version of your private ruling

Authorisation Number: 1012542297094

Ruling

Subject: Employee share scheme - assessable discount amount

Question

Is the discount amount assessable income in the 2011-12 income year?

Answer

Yes.

This ruling applies for the following periods:

Income year ended 30 June 2012.

The scheme commences on:

1 July 2011.

Relevant facts and circumstances

You were granted performance rights in company A in 2008, which vest in four separate tranches.

There was no amount payable in order to acquire the performance rights. Once vested to obtain the shares you needed to complete an exercise notice, the exercise price was nil.

Company A has a share trading policy that applies to directors, senior management and other employees in relation to dealing with company securities.

Company A's share trading policy states dealing with securities includes the following:

§ applying for, acquiring or disposing of, securities;

§ entering into an agreement to apply for, acquire or dispose of, securities; and

§ granting, accepting, acquiring, disposing, exercising or discharging an option or other right or obligation to acquire or dispose of securities.

The share trading policy states an employee must first inform the Approving Officer and obtain clearance from the Approving Officer before dealing with company securities.

You received an employee share scheme statement for the year ended 30 June 2012 advising you of an assessable discount amount.

You received advice in relation to the reason a deferred taxing point (cessation time) occurred in 2012:

§ Due to a change of control by company B over company C. As a result, the company with whom you were employed company D ceased to be a group member of company A resulting in a termination of employment with the company group in 2012.

In a letter you advised you were only notified of a tax event over a year later and had you known you would have sold the rights and paid the tax in the income year the cessation time occurred.

As outlined in company A's share plan, if a Change of Control Event occurs before the conclusion of a Performance Period the full number of Performance Rights will be vested irrespective of fulfilment of the Performance Hurdles.

You have now accepted a takeover offer for the sale of each share.

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 13A

Income Tax (Transitional Provisions) Act 1997 Division 83A

Reasons for decision

Former Division 13A of the Income Tax Assessment Act 1936 (ITAA 1936) provided that an employee acquires shares, under an employee share scheme if they were acquired in respect of or in relation directly or indirectly to the employment of the employee and were issued at a discount.

Rights are "qualifying rights" in accordance with section 139CD (ITAA 1936) if the following conditions are satisfied:

1. the rights were acquired by you under an employee share scheme;

2. the company is the employer of the taxpayer;

3. all the shares available under the scheme were ordinary shares and all the rights were in respect of such ordinary shares;

4. after the acquisition of the right, you do not hold an interest in more than 5% of the shares in the company;

5. after the acquisition of the right, you are 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.

Further, former Division 13A of the ITAA 1936 allowed a taxpayer who acquires qualifying rights to make a written section 139E election to include the discount in their assessable income in the year of acquisition.

For 2007-08 and previous income years, you had to make an election in writing, in the approved form as set out in Taxation Determination TD 97/23 if you want to have the discount on your rights assessed upfront. The written election must be made before, or at the time of lodgement of the tax return of the relevant year of income, or within such further time as the Commissioner allows.

Once made, you cannot revoke an election to instead be assessed on the discount at the cessation time.

If no election is made, the discount is included in a taxpayer's assessable income in the year cessation time occurs. The deferral of the discount is the default concession for qualifying rights or shares.

The cessation time for your rights is the earliest of the following times (subsection 139CB(1) of the ITAA 1936):

1. when your rights are disposed of (other than by exercise);

2. when your employment ceased with your employer, its holding company, or a subsidiary of your employer or its holding company;

3. if your rights are exercised, when the last of any disposal restriction or forfeiture condition in respect of the acquired shares expire;

4. when your rights are exercised, where there is no restrictions or conditions on the acquired shares; or

5. ten years from the date of acquisition of your rights.

In your circumstances

In your case, you were granted performance rights in company A in 2008. The rights were qualifying rights in accordance with section 139CD of the ITAA 1936. You did not make a section 139E election to include the discount on your performance rights upfront in the income year they were granted to you, therefore the discount will be assessable in the income year the cessation time occurs.

As outlined in company A's share plan, if a change of control event occurs before the conclusion of a performance period the full number of performance rights will be vested irrespective of fulfilment of the performance hurdles. In your circumstances your performance rights had already vested before the date of change in ownership occurred. At this time the relevant performance hurdles had already been met during the performance period of your rights.

The share trading policy states an employee must first inform the Approving Officer and obtain clearance from the Approving Officer before dealing with company securities.

In a letter you advised you were only notified of a tax event over a year later and had you known you would have sold the rights and paid the tax in the income year the cessation time occurred.

Additionally, as the company's share trading policy applies to the exercising of the options and the sale of the shares, the fact that you were able to exercise supports the fact there were no restrictions.

Therefore, there were no real disposal restrictions that prevented you from disposing of your shares as you could have requested approval from the Approving Officer to dispose of your shares. While you may not have been aware until over a year after the cessation time this does not preclude the fact that there were no longer any disposal restrictions or forfeiture conditions remaining when the change of ownership event occurred.

Subsequently, the cessation time occurred during the 2011-12 income year when there were no longer any disposal restrictions or forfeiture conditions in respect of your shares. The discount amount will be assessable income in the 2011-12 income year.

Please note: the ATO does not have the discretion to allow a taxpayer to disregard the ESS discount amount assessable at cessation time and only be assessed on the capital gain made when the shares are sold in a later income year.