Edited version of private advice

Authorisation Number: 1012679020047

Ruling

Subject: Employee share schemes

Question 1

Is the value of your ESS (employee share scheme) interests, acquired under an ESS that vested on the cessation of your employment, treated as part of a genuine redundancy payment?

Answer:

No

Question 2

Is the value of your ESS interests, acquired under an ESS that vested on the cessation of your employment, taxed at your personal marginal tax rate?

Answer:

Yes

This ruling applies for the following period(s)

Year ended 30 June 2014

The scheme commences on

1 July 2013

Relevant facts and circumstances

You were an employee of a company.

You were made redundant by the company in the relevant financial year.

As a consequence of your redundancy, some shares which had been reserved under a deferred employee share scheme (ESS) vested immediately.

You state that the shares would not have vested until a later date, and only then if you were still employed by the company.

The detailed tax summary provided by the company shows that the acquisition dates for the ESS interests are post 1 July 2009.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 Subdivision 83A-B

Income Tax Assessment Act 1997 Subdivision 83A-C

Income Tax Assessment Act 1997 Section 82-130

Income Tax Assessment Act 1997 Section 83-175

Income Tax Assessment Act 1997 Section 83-170

Income Tax Assessment Act 1997 Section 82-135

Reasons for decision

Employee share scheme (ESS) interests

Division 83A of the Income Tax Assessment Act 1997 (ITAA 1997) deals with the taxation of discounts on shares, rights and stapled securities (called ESS interests) acquired under an employee share scheme (ESS). The provisions of Division 83A apply to ESS interests acquired on or after 1 July 2009.

The default position is that a taxpayer who acquires an ESS interest under an ESS at a discount to market value is taxed on the discount at the time of the acquisition (Subdivision 83A-B of the ITAA 1997).

Subdivision 83A-C of the ITAA 1997 provides that where certain conditions are satisfied, the discount in relation to a beneficial interest in a share is not included in an employee's assessable income when they acquire the interest. Instead, under section 83A-110 of the ITAA 1997 the assessable income of the employee will include, at a later time, the market value of the interest at the ESS deferred taxing point reduced by the cost base of the interest.

Section 83A-115 of the ITAA 1997 explains that when deferred taxation applies to shares, the deferred taxing point is the earliest of the following times:

• when both of the following apply (subsection 83A-115(4)):

• there is no longer any real risk of forfeiture of the ESS interest (other than by disposing of it), and

• any genuine restrictions preventing disposal imposed at the time of acquiring the ESS interest are lifted

• when the taxpayer ceases the employment in respect of which the taxpayer acquired the ESS interest (subsection 83A-115(5)), or

• the end of seven years after the taxpayer acquired the ESS interest (subsection 83A-115(6)).

If the taxpayer disposes of the ESS interest within 30 days after the time worked out under the above rules, the ESS deferred taxing point is moved to the time of that disposal (subsection 83A-115(3)).

Subsection 82-130(1) of the ITAA 1997 provides that a payment is an employment termination payment if:

a) it is received by you:

i. in consequence of the termination of your employment; or

ii. after another person's death, in consequence of the termination of the other person's employment; and

b) it is received no later than 12 months after that termination (but see subsection (4)); and

c) it is not a payment mentioned in section 82-135.

Subsection 82-130(4) of the ITAA 1997 explains that paragraph 82-130(1)(b) does not apply to you if the payment is a genuine redundancy payment.

Subsection 83-175(1) of the ITAA 1997 provides that a genuine redundancy payment is so much of a payment received by an employee who is dismissed from employment because the employee's position is genuinely redundant as exceeds the amount that could reasonably be expected to be received by the employee in consequence of the voluntary termination of his or her employment at the time of the dismissal. Subsection 83-175(4) states that a payment is not a genuine redundancy payment if it is a payment mentioned in section 82-135.

The tax free treatment of a genuine redundancy payment is calculated according to section 83-170 of the ITAA 1997. A note to section 183-70 of the ITAA 1997 states that the remaining part of a genuine redundancy payment or an early retirement scheme payment (apart from the tax free portion) is an employment termination payment if section 82-130 applies to that part.

Section 82-135 of the ITAA 1997 explains that the following payments (among others) are excluded from being an ETP:

• an unused annual leave payment (see Subdivision 83-A);

• an unused long service leave payment (see Subdivision 83-B);

• the part of a genuine redundancy payment or an early retirement scheme payment worked out under section 83-170 (see Subdivision 83-C about the tax free treatment of genuine redundancy payments);

• an amount included in your assessable income under Division 83A of this Act (which deals with employee share schemes).

The effect of these exclusions is that even if these payments are received in a redundancy situation, they are not treated as genuine redundancy payments. They remain taxable in accordance with their own special rules.

Application to your circumstances

In your case, you were made redundant by the company in the relevant financial year. On the ceasing of your employment, some shares in which you acquired a beneficial interest in, under an ESS, vested. Accordingly, a deferred taxing point arose at this time. As a deferred taxing point has occurred, the discount you received on the acquisition of the ESS interests must be included in your assessable income in the financial year in which you ceased employment, that being the relevant financial year.

While the ESS interests vested on you ceasing employment, the benefit you received on acquiring the ESS interests (the discount) was not as a consequence of the termination of your employment. The benefit arose out of the earlier acquisition of the ESS interests and your participation in the ESS, your redundancy affected only the timing of the event.

As the discount on the ESS interests will be included in your assessable income under Division 83A of the ITAA 1997 it is specifically excluded from being an ETP (section 82-135) and from being a genuine redundancy payment (subsection 83-175(4)).

Accordingly, as the discount is not considered to be an ETP nor a genuine redundancy payment, the discount that had been deferred from the acquisition date is assessable at the time of cessation of employment. There is no special tax treatment for the discount received on ESS interests, instead it will be taxed at your personal marginal tax rate.