Edited version of your written advice

Authorisation Number: 1013034252586

Date of advice: 20 June 2016

Ruling

Subject: Employee share scheme - Reporting obligations

Question 1:

Does Division 392 of Schedule 1 to the Taxation Administration Act 1953 (TAA) require the Rulee to report to the employee and to the Commissioner that the Initial Tranche is assessable to the employee in the 20XX-XX income year?

Answer:

Yes.

Question 2:

Does the Rulee need to determine the market value of the Initial Tranche Options as at the date the Agreement was signed when preparing the statement required by Division 392 of Schedule 1 to the TAA?

Answer:

Yes.

Question 3:

Does Division 392 of Schedule 1 to the TAA require the Rulee to report to the employee and to the Commissioner that the Second Tranche is assessable to the employee in the 20YY-YY income year?

Answer:

Yes.

Question 4:

Does the Rulee need to determine the market value of the Second Tranche Options as at the date they are granted when preparing the statement required by Division 392 of Schedule 1 to the TAA?

Answer:

Yes.

Question 5:

Does Division 392 of Schedule 1 to the TAA require the Rulee to report to the employee and to the Commissioner that the Third Tranche is assessable to the employee in the 20ZZ-ZZ income year?

Answer:

Yes.

Question 6:

Does the Rulee need to determine the market value of the Third Tranche Options as at the date they are granted when preparing the statement required by Division 392 of Schedule 1 to the TAA?

Answer:

Yes.

This ruling applies for the following period<s>:

20XX-XX income year

20YY-YY income year

20ZZ-ZZ income year

The scheme commences on:

The scheme has commenced

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.

The Rulee is a listed public company.

By agreement (Agreement), the Rulee appointed the employee as a senior executive.

Clause X of the Agreement provides for options to be granted to as part of the remuneration package (Options). The Options entitle to acquire ordinary shares in the Rulee.

Clause X of the Agreement sets out the conditions that must be met for the Options to be granted. These are as follows:

• The employee must be appointed to their role and must continue to be employed;

• The Rulee's members must approve the grant of the Options: and

• The employee must perform to an acceptable level, as determined by the board.

Clause Y of the Agreement sets out the terms and conditions relating to the exercise of the Options. In summary:

• No amount is payable for the grant of the Options;

• The exercise price for each tranche of the Options is the lesser of a nominated amount and the volume weighted average price of the Rulee's shares at a particular time; and

• The Options can only be exercised during a set period of time.

Another Schedule to the Agreement sets out further terms and conditions relating to the Options. One Paragraph provides that the Options are not transferable. Another Paragraph provides that the Options lapse in certain circumstances (namely termination of employment and bankruptcy). This Paragraph also provides that the Options lapse within 6 months after the employee receives notice of termination of office or employment other than for cause. No other conditions are imposed in this Schedule as to when the Options can be exercised. Therefore, the employee is entitled to exercise the Options for a period of [x] years from grant so long as the employee remains employed (otherwise, the employee has [x] months from the date of notice of termination to exercise the Options).

Some months later, the Rulee held a meeting of its members at which the grant of the Options and terms of the Option Plan (Plan) were approved.

The Plan formally documents the terms and conditions applicable to the Options as contained in the relevant parts of the Agreement.

At the expected time, the Rulee granted the second Tranche Options to the employee. The Rulee issued a letter to the employee on the same date, stating that the Options are "subject to deferred taxation pursuant to Sub-division 83A-C of the Income Tax Assessment Act 1997 (Cth)."

The Initial Tranche Options and the Second Tranche Options have not been exercised.

The Third Tranche Options have not yet been granted. These Options will be granted shortly subject to the employee satisfying the conditions set out in clause X of the Agreement.

The employee's employment began after the Agreement was signed but before the meeting of members was held.

The Rulee is not carrying on a business of share trading.

The employee does not currently (and will not, after the issue of the Third Tranche Options) hold an interest in more than 5% of the Rulee's shares.

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

Assumptions

For the purpose of this ruling, it is assumed that:

• The employee's employment will continue as contemplated by the Agreement, and

• All applicable conditions mentioned in the Agreement are met.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 83A and

Taxation Administration Act 1953 Division 392 of Schedule 1.

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Question 1

Summary

Division 392 of Schedule 1 to the TAA requires the Rulee to report to the employee and to the Commissioner that the Initial Tranche is assessable to the employee in the 20XX-XX income year.

Detailed reasoning

The legal consequences of the Agreement must be understood before attempting to apply the employee share scheme provisions to the rights granted by the Agreement.

The Commissioner's position in relation to such a right granted in a contract is:

A right that, upon satisfaction of a condition in the contract, becomes a right to acquire a share, must be enforceable against the other party to the contract under the terms of the contract, even if only to the extent of the condition. The condition to be satisfied must be an essential or required precondition to the provision of a right to acquire a share. That is, satisfaction of the condition directly causes the taxpayer to have a right to acquire a share. This condition is referred to as a condition precedent to performance."

A detailed analysis of the relevant documents indicates that the employee would have been able to enforce these rights in relation to the Initial Tranche once the Agreement was signed.

Once that conclusion is reached, it doesn't matter whether the Initial Tranche immediately provided the employee with the right to acquire the Rulee's shares or becomes a right to acquire these shares at a later time. (It is the existence of the right that is important, not its immediate form.)

Once it is determined that the employee has been granted the right (that becomes the right to acquire the Rulee's shares) the standard employee share scheme provisions can be applied to determine when the taxing point is.

As at the date the Agreement was signed, the employee was a prospective employee rather than a current employee.

Consequently, at least one of the deferral conditions is not met and the rights are assessable as at the date the Agreement was signed.

Therefore, the Rulee must report to the employee and to the Commissioner that the Initial Tranche is assessable to the employee in the 20XX-XX income year to comply with the requirements of Division 392 of the TAA.

Question 2

Summary

The Rulee needs to determine the market value of the Initial Tranche Options as at the date the Agreement was signed when preparing the statement required by Division 392 of Schedule 1 to the TAA.

Detailed reasoning

As stated above, the taxing point for the Initial Tranche is the date the Agreement was signed.

Therefore, the amount of the employee share scheme discount is calculated as at this date.

The Rulee needs to determine the market value of the Initial Tranche Options as at this date when preparing the statement required by Division 392 of Schedule 1 to the TAA as this is a component of the calculation.

Question 3

Summary

Division 392 of Schedule 1 to the TAA requires the Rulee to report to the employee and to the Commissioner that the Second Tranche is assessable to the employee in the 20YY-YYincome year.

Detailed reasoning

A detailed analysis of the relevant documents indicates that the employee would not have the entitlement to enforce his rights in relation to the Second Tranche when the Agreement was signed as there were further requirements to be met.

Unless and until the employee actually commenced employment with the Rulee, the rights that they may have received under the contract pursuant to the Second Tranche were not enforceable (to any extent) against the Rulee as the employer. This is because the employee was required to actually commence employment before being able to enforce anything against the Rulee. This is evidenced by the operation of Clause X generally.

The grant of the options had a number of conditions attached to them - not the very least being that the employee was required to actually be "appointed to" and "continuing to be employed in the position of [Executive]". The grant of the options also required member approval and the employee performing to an acceptable level as determined by the Board.

The Agreement stated that, the employee was not to be appointed until some months later. Had the employee not ever commenced with the Rulee, the employee would have been unable to take any action against the Rulee, even to the extent of those conditions - the employee could not have enforced any rights to have member approval sought or have the Board consider whether the employee was performing to an acceptable level unless and until the employee commenced employment.

Consequently, whilst the employee obtained some rights at the time of execution of the contract, those rights did not "become" a right to a share for the purposes of section 83A-340 of the Income Tax Assessment Act 1997. It wasn't until the employee commenced employment, when the employee fulfilled the employee's part of the bargain and as a result, was in a position to enforce, at least to some extent, the conditions in clause X.

Once it is determined that the employee has been granted a right to acquire a share when employment began or some time later, the standard employee share scheme provisions can be applied to determine when the taxing point is.

In simple terms, the employee share scheme provisions apply to the Second Tranche as follows:

• Rights (that became rights to acquire shares) were granted to the employee on or after the date the employee began employment with the Rulee

• The basic conditions for deferral were met being:

• The employee being employed by the Rulee as at the grant date

• The rights providing the employee with the right to acquire the Rulee's ordinary shares

• The Rulee not being a share trading company, and

• The employee not holding or controlling more than 5% of the Rulee's shares

• An additional deferral condition was met as the rights were at a real risk of forfeiture as at the grant date

• The deferred taxing point happened due to the grant of the Options as they immediately vested and there were no forfeiture conditions or selling restrictions on any shares that would be acquired by exercising them.

Therefore, the Rulee must report to the employee and to the Commissioner that the Second Tranche is assessable to the employee in the 20YY-YY income year to comply with the requirements of Division 392 of the TAA.

Note: the Second Tranche would not have qualified for deferral if the rights had been granted when the Agreement was signed as that is before the employee's employment began.

Question 4

Summary

The Rulee needs to determine the market value of the Second Tranche Options as at their actual grant date when preparing the statement required by Division 392 of Schedule 1 to the TAA.

Detailed reasoning

As stated above, the taxing point for the Second Tranche is the grant date of the actual Options.

Therefore, the amount of the employee share scheme discount is calculated as at this date.

The Rulee needs to determine the market value of the Second Tranche Options as at this date when preparing the statement required by Division 392 of Schedule 1 to the TAA as this is a component of the calculation.

Question 5

Summary

Division 392 of Schedule 1 to the TAA requires the Rulee to report to the employee and to the Commissioner that the Third Tranche is assessable to the employee in the 20ZZ-ZZ income year.

Detailed reasoning

The same basic outcome as mentioned above in relation to the Second Tranche also applies to the Third Tranche. The taxing point will occur when the Third Tranche Options are granted to the employee.

Question 6

Summary

The Rulee needs to determine the market value of the Third Tranche Options as at the date they are granted when preparing the statement required by Division 392 of Schedule 1 to the TAA.

Detailed reasoning

As stated above, the taxing point for the Third Tranche is the grant date of the Options which will occur during the 20ZZ-ZZ income year.

Therefore, the amount of the employee share scheme discount is calculated as at the grant date.

The Rulee need to determine the market value of the Third Tranche Options as at their grant date when preparing the statement required by Division 392 of Schedule 1 to the TAA as this is a component of the calculation.