| Disclaimer This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law. You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4. |
Edited version of your written advice
Authorisation Number: 1012934748339
Date of advice: 12 January 2016
Ruling
Subject: Employee share scheme - forfeiture of options
Question:
Can you amend your income tax returns for the 20VV-WW and 20WW-XX income years to remove the discounts that relate to the options that recently lapsed?
Answer:
No.
This ruling applies for the following period<s>:
20VV-WW income year
20WW-XX income year
The scheme commences on:
1 July 2010
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.
You are an employee of company A Limited (company A).
About five years ago, you were issued with Options under their employee share scheme for $nil consideration and at a discount to their market value.
You were issued with Options that were split into three equal tranches with vesting dates of:
• one year after the grant date
• two years after the grant date, and
• three years after the grant date.
All Options had the same exercise price and were to expire five years after the grant date.
The share price for company A had increased significantly when the Options reached each of the vesting dates, therefore you had to recognise the discounts from tax-deferred schemes as assessable income in each of these tax returns.
The first tranche vested after one year. You exercised and sold this tranche shortly after they vested.
You did not exercise the second or third tranche as you believed that the share price would go up again. You did have the chance to exercise these Options between the vesting date and the expiry date (but not within the blackout periods during the reporting season).
One company A share was only worth about half of the exercise price by the time it came to the expiry date. Therefore it would not have been a sound decision to exercise the Options.
Certain documents were provided with the 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 Section 83A-310.
Reasons for decision
Summary
You cannot amend your income tax returns for the 20VV-WW and 20WW-XX income years to remove the discounts that relate to the options that recently lapsed.
Detailed reasoning
The general operation of the employee share scheme provisions would see the amounts shown on the employee share scheme statements being included in your assessable income as the discounts from deferral schemes.
From that point in time forward, the Options are considered to be an investment for capital gains purposes. The market value of the Options calculated at the employee share scheme taxing point is used as the first element of the cost base and the reduced cost base of the Options.
The forfeiture provision acknowledges that there are instances where it is inappropriate for the discount received on Options to be assessable under the employee share scheme provisions if they are subsequently forfeited. In such cases, the employee share scheme provisions are taken never to have applied to the forfeited Options.
The forfeiture provision that applies to grants of Options between 1 July 20YY and 30 June 20ZZ requires all of the following conditions to be met:
• The employee share scheme provisions would otherwise include an amount in your assessable income as an employee share scheme discount
• You forfeited or lost the Option (without having disposed of it or exercised it, and
• The forfeiture or loss is not the result of:
• A condition of the scheme that protects you against a fall in the market value of the Options, or
• A choice made by you (other than a choice by you to cease employment).
We accept that the first two conditions are met and that the employee share scheme did not protect you from a fall in the market value of the Options or any shares that you might acquire by exercising the options.
Your real question is about the final condition - is the forfeiture or loss due to a choice made by you? The forfeiture provision is not intended to protect you from downside market risk and is not available if you merely choose not to exercise the Options.
In your private ruling application, you argued that:
'I had no choice but to forfeit or lose the ESS interests, as I am still employed by company A Limited and the market price on the last day of trading was lower than the exercise price.'
With this statement, you are actually acknowledging that you could legally have exercised the options once they vested (except during the blackout periods) but have concluded that this was not a sound financial decision to make.
This financial reason for allowing the Options to expire is considered to be a choice that you made.
Therefore, the final condition is not met and the forfeiture provision is not available to you to authorise the removal of your discounts from your 20VV-WW and 20WW-XX tax returns.
Note: you have made a capital loss due to the expiry of these Options.