Edited version of your written advice

Authorisation Number: 1051220084165

Date of advice: 3 May 2017

Ruling

Subject: Employee Share Schemes

Question

Did the deferred taxing point occur during the 201Y-1Z income year in relation to the Performance Rights that vested on a date in 201Y?

Answer

No

This ruling applies for the following periods:

1 July 2016 to 30 June 2017

The scheme commences on:

1 July 2013

Relevant facts and circumstances

The Taxpayer is a senior employee at the Company.

On a date in 201W the Taxpayer was issued Performance Rights (201W Performance Rights) with a number of different classes.

The issue of these rights was done by shareholder resolution at the 201W Annual General Meeting.

On a date in 201X the Taxpayer was issued a number of Performance Rights (201X Performance Rights) with a number of different classes.

The issue of these rights was done so by shareholder resolution at the 201X Annual General Meeting. The offer and acceptance form with respect to these rights specifically states that the rights are subject to deferred taxation.

The Taxpayer was advised on a date in 201Y via two separate letters that a number of the 201W and 201X Performance Rights had vested following the satisfaction of relevant key performance criteria.

Following board approval, the taxpayer was issued a number of company shares on a date in 201Y.

The Company Securities Trading Policy (“the policy”) provides that senior employees of the Company can only trade share during trading windows, and then only with written permission from the chairman or from a majority of the board.

Employees are prohibited from dealing in the Securities even during the open Window Period if they are in possession of Insider Information.

Under the Corporations Act, you are prohibited from Dealing in Securities if you are in possession of insider information.

Insider Information is information:

a) about the Company which is not generally available to the public; and

b) which a reasonable person would expect to have a material effect on the price of the Securities.

The Taxpayer has been in possession of information that would be considered insider information under this definition during every open window since exercising the options.

The terms and conditions of the 201W performance rights issued included performance criteria linked to both Total Shareholder Return and increase in nominal share price. They also provide that should the Taxpayer resign before the vesting date of the rights, the rights will expire.

The terms and conditions of the 201Y Performance Rights expressly state that the scheme is subject to deferred taxation.

For the purposes of the ruling, the Security Trading Policy and other documents describing the Performance Rights Plans and the vesting offers, and the Timeline of Events form part of the facts.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 83A.

Reasons for decision

Summary

The deferred taxing point did not occur during the 201Y-1Z income year in relation to the Performance Rights that vested on a date in 201Y.

Detailed reasoning

The employee share scheme (ESS) provisions are contained in Division 83A of the Income Tax Assessment Act 1997 (ITAA 1997).

In summary, the employee share scheme provisions recognise the dual nature of grants of shares or rights to acquire shares (collectively ESS interests) as both a component of an employee’s remuneration package and also as an ongoing investment.

To this end, the employee share scheme provisions provide a mechanism for recognising an appropriate value for remuneration purposes and an adjustment to the purchase price for investment purposes to reflect the amount treated as remuneration.

The employee share scheme provisions achieve this outcome by determining:

● When a taxpayer needs to include any discount received in relation to ESS interests in their assessable income, and

● The amount of the discount.

The attributes of the Company Securities Trading policy are such that Division 83A of the ITAA 1997 applies to the Taxpayer in the following manner:

● The Performance Rights are ESS interests - being rights to acquire beneficial interests in shares in a company

● The relationship between the Taxpayer, the Company and the grants of Performance Rights constitute an employee share scheme

● The Performance Rights were granted at a discount to their market value (calculated as at the date of grant)

● The Performance Rights meet the conditions to qualify for tax deferral

● The first potential deferred taxing point occurred for the Taxpayer on a date in 201Y when the Performance Rights vested

● The amount of the discount is worked out and is assessable at the deferred taxing point

The deferred taxing point for the 2014X Performance Rights is determined in accordance with section 83A-120 of the ITAA 1997 (as applicable to ESS interests granted between 1 July 2009 and 30 June 2015) as the earliest of the following:

● The earliest time that there are no selling restrictions on the Equity Rights

● Cessation of the Taxpayer’s employment

● Seven years from the grant date of the rights, or

● The earliest date that all of the following conditions are met:

− The forfeiture conditions on the Equity Rights end

− Any exercise restrictions end (if there were some when they were granted)

− Any forfeiture conditions on the shares acquired by exercising the Equity Rights end, and

− Any selling restrictions on the shares acquired by exercising the Equity Rights end.

The deferred taxing point for the 201Y Performance Rights is determined in accordance with section 83A-120 of the ITAA 1997 (as applicable to ESS interests granted after 30 June 2015) as the earliest of the following:

● The earliest time that there are no selling restrictions on the Equity Rights

● Cessation of the Taxpayer’s employment

● Fifteen years from the grant date of the rights, or

● The earliest date that all of the following conditions are met:

− You have exercised the Rights, and

− Any forfeiture conditions on the shares acquired by exercising the Equity Rights end, and

− Any selling restrictions on the shares acquired by exercising the Equity Rights end.

At present, the first three possible deferred taxing points have not occurred for either the 201X or 201Y Performance Rights. The Taxpayer is a continuing employee of the Company, the Performance Rights could not be sold while they were rights and they were granted less than seven or fifteen years ago respectively.

Therefore we will be considering the fourth possible deferred taxing point.

For the 201X Performance Rights, subsection 83A-120(7) of the ITAA 1997 (as applicable to ESS interests granted between 1 July 2009 and 30 June 2015) states:

The 4th possible taxing point is the earliest time when:

(a) there is no real risk that, under the conditions of the scheme, you will forfeit or lose the ESS interest (other than by disposing of it, exercising the right or letting the right lapse); and

(b) if, at the time you acquired the ESS interest, the scheme genuinely restricted you immediately exercising the right - the scheme no longer so restricts you; and

(c) there is no real risk that, under the conditions of the scheme, if you exercise the right, you will forfeit or lose the beneficial interest in the share (other than by disposing of it); and

(d) if, at the time you acquired the ESS interest, the scheme genuinely restricted you immediately disposing of the beneficial interest in the share if you exercised the right - the scheme no longer so restricts you.

The first three conditions within the fourth possible deferred taxing point were met on a date 201Y when the Equity Rights vested and the Company shares were issued. The forfeiture conditions on the Equity Rights have ended, they have been exercised and there are no forfeiture conditions on the Company shares.

For the 201Y Performance Rights, subsection 83A-120(7) of the ITAA 1997 (as applicable to ESS interests granted after 30 June 2015) states:

The 4th possible taxing point is the earliest time when:

(a) you exercise the right; and

(c) there is no real risk that, under the conditions of the scheme, after exercising the right, you will forfeit or lose the beneficial interest in the *share (other than by disposing of it); and

(d) if, at the time you acquired the ESS interest, the scheme genuinely restricted you immediately disposing of the beneficial interest in the share if you exercised the right—the scheme no longer so restricts you.

The first two conditions within the fourth possible deferred taxing point were met on a date in 201Y when the Equity Rights vested and the Company shares were issued. The Equity Rights have been exercised and there are no forfeiture conditions on the Company shares.

Has the Taxpayer been genuinely restricted from selling the Company shares?

The real question relates to condition (d) in the fourth possible deferred taxing point. Restating this provision it would read:

What is the earliest time when the scheme no longer genuinely restricts the Taxpayer from immediately disposing of his beneficial interest in the share (after 4 August 2016)?

The test within this provision is ‘genuinely restricts’, which contrasts from the former Division 13A of Part III of the Income Tax Assessment Act 1936 where the equivalent test for rights to acquire shares at paragraph 139CB(1)(c) was ‘any restriction’.

The explanatory memorandum for the Tax Laws Amendment (2009 Budget Measures No. 2) Bill 2009 states the following in relation to genuine selling restrictions for shares and rights to acquire shares:

1.192 Genuine restrictions preventing disposal could include a condition of the scheme that contractually prevents disposal of shares. If disposing of an ESS interest would be a criminal offence, for example under a law regulating insider trading, then the employee would also be considered genuinely restricted from disposing of the share.

1.193 A company's internal share trading policy is only considered to be a restriction preventing disposal for the purposes of deferring the taxing point if the penalty for breaking the policy constitutes an effective sanction. This means that if there is no legal prohibition on the disposal of the ESS interest, there must be serious and enforced consequences for breaching the policy.

1.194 A restriction that otherwise meets the conditions for a genuine restriction, but is able to be lifted in cases of severe financial hardship, is nonetheless considered to be a genuine restriction.

1.195 Restrictions preventing disposal are considered to be lifted once an opportunity arises in which a taxpayer can realise the share.

1.196 In the case of a trading window, or restrictions that may lift and then re-engage, if the employee does not avail themself of the opportunity to dispose of the share and the window subsequently closes, there is no further delay in the taxing point. The taxing point would still be at the commencement of the first trading window.

1.197 The restriction and conditions covered by the deferred taxing points are only those that existed when the employee acquired the ESS interest. Conditions and restrictions that have been added subsequent to acquisition are ignored for the purposes for determining the deferred taxing point.

…

1.200 The taxing point is the point at which the taxpayer can take some action to realise the benefit. It does not matter whether or not they chose to do so.

The Taxpayer’s situation

The Taxpayer is subject to strict limitations on his ability to deal in the Company shares. The Taxpayer must receive written permission from the chairman or the board in order to buy or sell shares in the Company.

This requirement would have been sufficient to continue the deferral period under the ‘any selling restriction’ test that applied under the former employee share scheme provisions. However, it is not sufficient without further analysis to constitute a ‘genuine selling restriction’ for the purpose of Division 83A of the ITAA 1997.

Consequently, the ‘genuine selling restriction’ test could be re-stated in the Taxpayer’s case as:

What is the earliest time (after a date in 201Y) that the Taxpayer could have made a request to sell their Company shares that could have been approved by the Chairman or the board?

For the purpose of this ruling, it is not required to determine when this ‘earliest time’ will occur; merely whether it occurred during the 201Y-1Z income year.

As a senior employee, the Taxpayer is strictly prohibited from dealing in Company shares during the black-out periods and during periods that he held inside information.

The Taxpayer held inside information for the whole of the period from the vesting date until the end of the 201Y-1Z financial year. Consequently, the Taxpayer was not in a position to request permission to sell the shares and was prohibited from dealing with the Company shares during the whole of this period.

Therefore, the Taxpayer was subject to genuine selling restrictions for the whole of this period meaning that the deferred taxing point has not occurred during the 201Y-1Z income year. Instead, the deferred taxing point will occur in a later income year.