Edited version of private advice

Authorisation Number: 1012681975602

Ruling

Subject: Employee share scheme

Question 1

Will the equity rights granted under the employee share scheme you participated in be a beneficial interest in a right to acquire a beneficial interest in a share and consequently section 83A-120 of the Income Tax Assessment Act 1997 (ITAA 1997) apply?

Answer

Yes

Question 2

Will the deferred taxation point under section 83A-120 of the ITAA 1997 be the 4 April 2014, the date you ceased employment with the company?

Answer

Yes

Question 3

Will the market value of the ESS interest to be included in your assessable income be the market value of the shares as listed on the Australian Stock Exchange (ASX) on the date you ceased employment?

Answer

Yes

This ruling applies for the following periods:

Income year ended 30 June 2014

Income year ended 30 June 2015

The scheme commences on:

1 July 2013

Relevant facts and circumstances

You were employed by a company.

You participated in the company's employee share scheme.

You were granted rights in three separate tranches over three years.

Each right entitled you to purchase a share in the company for no consideration.

The rights would vest on the three year anniversary of receiving the rights.

The rights would be forfeited if you left the employment of the company, however certain events such as retirement allowed for a pro rata allocation of rights.

You retired and ceased employment with the company on x.

X number of the rights vested on x, the remainder forfeited.

You sold the shares on x.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 83A-10

Income Tax Assessment Act 1997 section 83A-35

Income Tax Assessment Act 1997 section 83A-105

Income Tax Assessment Act 1997 section 83A-110

Income Tax Assessment Act 1997 section 83A-120

Income Tax Assessment Act 1997 section 83A-315

Reasons for decision

Employee Share Schemes

All references are to the Income Tax Assessment Act 1997 (ITAA 1997).

Division 83A applies to shares, rights and stapled securities acquired under an employee share scheme on or after 1 July 2009.

An employee share scheme is defined in subsection 83A-10(2) as a scheme under which ESS interests in a company are provided to employees, or associates of employees, of the company, or a subsidiary of the company, in relation to the employee's employment.

An ESS interest in a company is defined in subsection 83A-10(1) as a beneficial interest in:

(a) a share in the company; or

(b) a right to acquire a beneficial interest in a share in the company.

The equity rights issued under the employee share scheme entitle the holder of the right to be allocated one fully paid ordinary share on vesting. Accordingly the rights give an ownership interest in a share which is clearly a beneficial interest, therefore Division 83A will apply.

Subdivision 83A-C

Subdivision 83A-C allows for the deferral of tax on the amount assessable in respect of an ESS interest if certain conditions are satisfied. Subdivision 83A-C will apply to the Rights if the following conditions in section 83A-105 are satisfied:

(a) subdivision 83A-B would, apart from section 83A-105, apply to the Rights; and

(b) subsections 83A-35(3), (4), (5) and (9) apply to the Rights; and

(c) there is a real risk that a Participant will forfeit or lose the interest (other than by disposing of it, exercising the right or letting it lapse) pursuant to subsection 83A-105(3).

In this circumstance all the above requirements are met as:

• at the time of receiving the shares you were employed by the company

• the equity rights grant an interest in an ordinary share

• the predominant business of the company is not the acquisition, sale or holding of or shares or other investments.

• you will not hold a beneficial interest in more than five precent of the total securities of the company

• the rights were under a real risk of forfeiture due to the requirement of a minimum term of employment of three years.

Consequently deferred taxation will apply and the value of the employee share scheme will need to be included in your taxable income at the deferred taxation point calculated under 83A-120.

ESS deferred taxing point

Section 83A-120 provides the rules for determining when the ESS deferred taxing point occurs where you as the holder of beneficial interest in a right. This will be the earliest of the following times:

• when the employment in respect of which they acquired the rights ends as per subsection 83A-120(5)

• seven years after acquiring the rights as per subsection 83A-120(6)

• when the right has not been exercised, there is no real risk of forfeiting the right, and the scheme no longer genuinely restricts disposal of the right as per subsection 83A-120(4)

• when there is no real risk of forfeiting the right or underlying share, and the scheme no longer genuinely restricts exercise of the right or disposal of the resulting share as per subsection 83A-120(7).

The word 'exercise' as used in Division 83A is not a defined word, thus it should take its ordinary meaning having regard to its legislative context and the purpose or object of the statute. For the purposes of Division 83A, the concept of 'exercising a right' is not considered to necessarily require an action or activity by the beneficial owner of the right. It is enough that they become the beneficial owner of the share that was the subject of the right, without having to do anything, that is, it happens automatically or is instigated by the employer or another party. Therefore, you are taken to have exercised the rights when securities are allocated on vesting of the rights.

In respect to your circumstances, the ESS deferred taxing point will be earliest of the following:

• the time when the shares vested and were no longer under any restrictions which was x

• the time when you ceased employment with the company on the x, and

• seven years from the date you were granted the rights, which will be either on the x, x or x.

Therefore the ESS deferred taxing point of your equity rights will be the when you ceased your employment on the x. As the shares were disposed of more than 30 days after the deferred taxation point the 30 day rule will have no application and you will have a separate CGT event on the sale of the shares.

Amount to be included in assessable income

In accordance with section 83A-110, the amount to be included in assessable income at the ESS deferred taxing point will be the market value of the ESS interest reduced by the cost base of the interest.

Section 83A-315 provides that whenever Division 83A uses the market value of an ESS interest, you must instead use the amount specified in the regulations for the purposes of section 83A-315 if the regulations specify an amount.

Subregulation 83A-315.01(1) of the Income Tax Assessment Regulations 1997 (ITAR) applies to unlisted rights that must be exercised within ten years of acquisition and therefore applies to the rights granted to you. Under this subregulation you can choose to value your right at either:

• the market value according to its ordinary meaning; or

• the amount determined by the application of the rest of the regulations in Division 83A of the ITAR.

Under regulation 83A-315.02 of the ITAR, if a right is not quoted on an approved stock exchange on a particular day, the market value of the right (for the purpose of the regulation) is the greater of:

(a) the market value (on that day) of the share that may be acquired by exercising the right, less the lowest amount that must be paid to exercise the right; or

(b) subject to regulation 83A-315.03 of the ITAR, the value determined in accordance with regulations 83A-315.05 to 83A-315.09 of the ITAR.

Regulation 83A-315.03 of the ITAR provides that if the lowest amount that must be paid to exercise a right to acquire a beneficial interest in a share is nil, the value of the right on a particular day is the same as the market value of the share on that day.

In your circumstance as per the relevant Equity Plan Guidance Notes and Plan Rules you were not required to pay any amounts in respect of the grant or vesting of the equity rights, or upon the allocation of shares. Consequently the market value of the right will be the market value of the share on the 4 April 2014.