Edited version of your written advice

Authorisation Number: 1013126431082

Date of advice: 24 November 2016

Ruling

Subject: Employee Share Scheme - Taxing Point

Question 1

Is the Individual in an employee-like relationship with the Company for the purposes of Division 83A of the Income Tax Assessment Act 1997?

Answer

Yes

Question 2

Were the options issued to the Individual as part of an Employee Share Scheme (ESS)?

Answer

Yes

Question 3

Is the ESS taxing point a date in 201Z?

Answer

Yes

This ruling applies for the following periods:

1 July 201X to 30 June 201X

1 July 201X to 30 June 201X

The scheme commences on:

Mid 201X

Relevant facts and circumstances

The Personal Services Entity (the PSE) entered into a contract with the Company on a date in 201X. The contract was for X months, with the option to extend with mutual agreement. The Individual was a party to the contract.

Under the contract, the PSE was engaged by the Company. The PSE purported to be an independent contractor. The contract appointed the Individual as the nominated individual required to provide their services as a consultant to the Company. The position commenced on a date in 201X. The Company paid the PSE an amount per month under the contract for the Individual's services.

The contract specified that the Company would issue the PSE or the Individual a number of unlisted options to acquire shares in the Company exercisable at a price on or before a date in 201Y, subject to conditions. A number of these options were exercised by the Trust.

On a date in 201Y the Company wrote to the Individual in their personal capacity and made them an offer to acquire a number of unlisted options with an exercise price of an amount, an expiry date of a date in 201Z and one of two performance conditions that needed to be met before the options could be exercised. These options were offered as part of the Company's employee option placement scheme.

The Individual accepted the offer on a date in 201Y. They registered the options to the Trust, their associate. The Trust received the options on a date in 201Y. The conditions allowing the options to be exercised were met on a date in 201Z. The Trust exercised the options on a date in 201Z.

Before accepting the options, the Individual received advice from a tax advisor, and was informed they were eligible for the ESS scheme.

The Trust decided to exercise the options on a date in 201Z, despite the options strike price being higher than the market price for the underlying shares on that day.

The Company has declined to issue an ESS statement to the Individual for the options.

The Company has listed the Individual in relevant reports as ABC. All other employees who received options were considered to be part of an ESS and the option scheme was designed to provide incentive to employees.

Through the PSE, the Individual's services are contracted to a number of companies. Other incentives issued for work contracted for via the PSE performed by the Individual have been issued to the Individual in their personal capacity, and performance based to provide incentive for the Individual to achieve results.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 Section 83A-120

Taxation Administration Act 1953 Division 392

Reasons for decision

Question 1

Is the Individual in an employee-like relationship with the Company for the purposes of Division 83A of the Income Tax Assessment Act 1997?

Summary

The Individual is in an employee-like relationship with the Company for the purposes of s83A-325. The Individual was a party to the contract between the PSE and the Company. The options are a reward for services that the Individual provided to the Company. The Individual directed the Company to pay them to the Trust.

Detailed reasoning

Division 83A of the Income Tax Assessment Act 1997 (ITAA 97) sets out the rules for employee share schemes (ESS). Section 83A-325 extends ESS to employee-like relationships. The provision refers to relationships similar to employment. A relationship does not need to be a direct contractual connection; it can also encompass a more informal connection between the individual and an entity to which services are provided by the individual.

The wording of the provision refers to the 'arrangement'. The way the term arrangement is defined looks beyond whether an arrangement is enforceable. In other words, an ESS is not confined to formal contracts.

If an individual performs services using a personal services entity and that entity contracts to provide the services to another entity, we need to look to the relationship (if any) between the individual and that other entity. Whether or not there is a relationship is a question of fact. To determine this we look at whether the individual is known, understood or expected to be the person performing the services.

This relationship between the individual and the ultimate receiver of the services stands apart from any contractual arrangement using an interposed entity and therefore an informal relationship between the ultimate receiver of the services and an individual is not excluded from consideration merely because the individual and the interposed entity have a contractual arrangement. The individual has separate relationships with each entity.

Where an entity (as ultimate receiver of the services) has provided a specified individual a share or a right to a share, this is strong evidence of the existence of a relationship between the two. If the provision of that share or right to a share can in any way be connected or related to the provision of services by the individual, it is a relationship similar to employment.

Where a relationship similar to employment is found to exist, an associate of the individual is able to receive the ESS interests in their place.

Relevance to your situation

The Individual does not have a direct employment relationship with the Company. The PSE is an interposed personal services entity. However, the Individual has a relationship with the Company, who is the ultimate receiver of their services. The Company has given the Individual the options to provide them with an incentive to work hard in their role as XYZ. There is an employee-like relationship between the two. This relationship between the Company and the Individual is not precluded by the contract that exists between the PSE and the Individual. The Individual has a separate relationship with each entity.

Because there is an employee-like relationship, the Individual was able to assign the options to their associate the Trust and still remain within the scope of the ESS rules.

Question 2

Were the options issued to the Individual as part of an Employee Share Scheme (ESS)?

Summary

The Individual has received the options under an ESS scheme. They must treat the options as part of an ESS, even if the Company has not issued them with an ESS statement.

Detailed reasoning

The Individual was offered and accepted options in the Company as a result of their work as XYZ for the Company. The options they received were part of a larger scheme to supply rights to acquire shares in the Company to key management personnel. (The Company employee option scheme). The purpose of the scheme was to promote motivation, company ownership and loyalty with key personnel, and align the interests of employees with those of shareholders.

An ESS interest in a company includes a right to acquire a beneficial interest in the company (an option). An ESS is defined as a scheme where ESS interests are provided to employees in relation to their employment. This includes relationships similar to employment. While it is usual for a participant in an ESS to receive an ESS statement from their employer, not receiving the statement does not mean they are not participating in an ESS.

There are reporting requirements for ESS; to the ATO, and to individuals who are participants in the ESS. Division 392 of Schedule 1 of the Taxation Administration Act 1953 sets out the requirements for an employer to report ESS to the ATO. An employer is also required to supply an ESS statement to an employee where an ESS delayed taxing point occurs in an income year. However the failure of the Company to supply the Individual with such a statement does not change the fact that the Individual is a participant in the ESS.

Question 3

Is the ESS taxing point December 201X?

Summary

The Individual met the first deferred taxing point on a date in 201Z. They did not dispose of the shares obtained within 30 days of the taxing point. The date in 201Z is the date the tax on the ESS (if any) would be payable.

Detailed reasoning

The ESS legislation allows for the deferral of tax on the amount assessable in respect of an ESS interest if certain conditions are satisfied. Amongst others, there must be a genuine disposal restriction or a risk of forfeiture.

The rules for determining when the ESS deferred taxing point occurs where you are the holder of beneficial interest in a right state that it will be the earliest of the following times:

● when the employee ceases the employment in respect of which they acquired the right (subsection 83A-120(5))

● when there is no real risk of forfeiting the right and the scheme no longer genuinely restricts disposal of the right (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, (subsection 83A-120(7)).

● 7 years after the employee acquired the right (subsection 83A-120(6))

If the employee disposes of the ESS interest (or the share acquired on exercise of the right) within 30 days of the deferred taxing point, the deferred taxing point will instead be the date of that disposal (this is called the 30-day rule).

The options issued to the Individual in 201Y had conditions preventing them being exercised until either certain conditions were met by the company, or other conditions were met. The Individual was genuinely restricted from selling or exercising the rights to obtain the underlying shares until the Company met one of the conditions. One of the conditions was met on a date in 201Z.

The Individual exercised the options on a date in 201Z. They did not dispose of the shares they obtained within 30 days of the date in 201Z. Consequently, the Individual's deferred taxing point will occur on that date in 201Z. The price of the options on that date in 201Z should be used to calculate the Individual's tax liability (if any).