Edited version of your written advice

Authorisation Number: 1051428626709

Date of advice: 22 November 2018

Ruling

Subject: Employee share schemes

Question

Will Company A have reporting obligations under section 392-5(1)(b) of Schedule 1 of the Taxation Administration Act 1953 (TAA 1953) in relation to Restricted Shares granted under the Employee Equity Plan (EEP) on the earliest of the following events occurring:

a) When the Restricted Shares vest and any disposal restrictions cease to apply

b) When the relevant Eligible Employee is treated as ceasing employment within the meaning of section 83A-330 of the Income Tax Assessment Act 1997 (ITAA 1997), or

c) 15 years from when the Restricted Shares are granted?

Answer

Yes.

This ruling applies for the following periods:

Income year ending 30 June 20xx

Income year ending 30 June 20xx

Income year ending 30 June 20xx

Income year ending 30 June 20xx

Income year ending 30 June 20xx

The scheme commences on:

1 July 20xx

Relevant facts and circumstances

1. Company A is an Australian company listed on the Australian Securities Exchange (ASX).

2. The Share Plan is a new employee share scheme plan adopted by Company A to allow the Board to make offers to incentivise Eligible Employees through the acquisition of securities in Company A.

3. The Share Plan is governed by the Plan Rules.

4. The Plan Rules define an Eligible Employee as an employee of Company A or its subsidiaries (collectively, the Group) including a Director employed in an executive capacity or any other person who is declared by the Board to be eligible to receive a grant of Incentive Securities under the Share Plan.

5. The Plan Rules contemplate Eligible Employees being offered Incentive Securities, which may comprise any one or more of Rights, Options and Restricted Shares in Company A. This ruling only considers the tax issues regarding Restricted Shares, being fully-paid ordinary shares in Company A.

6. Under the Plan Rules, an Offer of Restricted Shares can be made to Eligible Employees, being employees of the Group.

7. To the extent of any inconsistency, the terms and conditions advised to an Eligible Employee by the Board in an Offer will prevail over any other provision in the Plan Rules.

8. As soon as practicable after an Eligible Employee has accepted an Offer to be granted Restricted Shares, the Board must, subject to its discretion, allocate the Restricted Shares to the Eligible Employee.

9. Upon allocation, the Eligible Employee will receive fully-paid ordinary shares in Company A, subject to the dealing restrictions (Restricted Shares).

10. A Share only ceases to be a Restricted Share where the Vesting Period and each other relevant condition (including all Vesting Conditions) advised to the participant by the Board have been satisfied or otherwise waived by the Board, and Company A has notified the participant that the restrictions in respect of the Restricted Shares have ceased and no longer apply. At this point in time, the Restricted Shares are said to “Vest”.

11. The number of Restricted Shares offered will be calculated by dividing the dollar value of the participant’s Award by the volume weighted average closing price of Company A Shares traded on the ASX during the five trading days immediately preceding the grant date, rounded up to the nearest whole number of Restricted Shares.

12. The Restricted Shares carry full dividend and voting rights.

13. The Restricted Shares will Vest on or around each of the Vesting Dates set out in the Offer letter if the conditions of Offer are met, including:

● the Eligible Employee is an employee of the Group on the relevant Vesting Date

● any expected performance outcomes on which the original Offer was based have been realised, or can still reasonably be expected to be realised on the relevant Vesting Date, and

● the Eligible Employee has met the minimum risk and compliance requirements applicable to their role over the applicable Vesting period.

14. The Restricted Shares will be forfeited in the event of:

● cessation of the Eligible Employee’s employment by being summarily terminated or resigning

● the Eligible Employee retiring within six months of the grant of the Restricted Shares, subject to the requirements in fact 17 below

● a Change of Control Event where there is either a Takeover Bid of Shares, or other transaction, event or state of affairs that in the Board’s opinion is likely to result in, or should otherwise be treated as, a change in Control of the Company

● the Eligible Employee contravenes the dealing restrictions, or

● the Eligible Employee notifying Company A in writing that they elect to surrender their Restricted Shares.

15. The Restricted Shares may also be forfeited to prevent the Eligible Employee from becoming entitled to any inappropriate benefits. The Plan Rules contain provisions designed to prevent Eligible Employees from obtaining an inappropriate benefit and include where, in the opinion of the Board, an Eligible Employee participating in the Share Plan has:

● acted fraudulently or dishonestly or engaged in gross misconduct

● acted in a manner which brings the Company or the Group into disrepute

● there is a Financial Misstatement Circumstance

● the Company or Group is required or entitled to reclaim remuneration or reduce your remuneration outcome under law, regulation or Group policy; or

● vesting is not justified or supportable in the opinion of the Board having regard to your personal performance and/or conduct.

16. In relation to cessation of employment, if an Eligible Employee ceases employment in circumstances other than resigning, being summarily terminated, or retiring within six months of the date of grant of the Restricted Shares, the Eligible Employee will be considered a ‘good leaver’ and their Restricted Shares will remain on foot and will vest in the ordinary course.

17. Company A’s Retirement Policy requires employees to provide at least six months written notice of their retirement. Those who participate in Share and Rights Plans must provide a statutory declaration that should include statements to the following effect:

● that the employee intends to retire

● that the employee does not, other than as set out in the statutory declaration, intend to become permanently employed on a full-time or part-time basis in the future, and

● the date upon which the employee intends to retire

18. The Plan Rules contain post cessation discretions that allow the Board to forfeit any or all Shares, including Restricted Shares, which are still held by the Eligible Employee where the Board has determined in good faith that the Eligible Employee has breached a Post Cessation Covenant, or a change in the Eligible Employee’s circumstances since he or she ceased to be employed by the Group means it is no longer appropriate for the Eligible Employee to retain the benefits. Examples of this would be where the Eligible Employee commences employment with a competitor, or where the Participant purported to retire from the workforce and subsequently recommences employment.

19. Post Cessation Covenant in respect of an Eligible Employee means:

a) a restriction or undertaking owed to the Group in connection with the Eligible Employee’s former employment with the Group, or

b) any compromise or contractual arrangement in relation to the cessation of the Eligible Employee’s employment with the Group.

20. The Restricted Shares will be granted directly to Eligible Employee.

21. An Offer of Restricted Shares under the Share Plan will be in respect of the deferred component of employees’ short term variable remuneration, retention awards, sign-on awards and project awards and are granted free of charge.

22. Company A offers a number of other employee share schemes to its employees.

23. No Eligible Employee participating in the Share Plan will hold a beneficial interest in more than 10% of the shares in Company A, or be in a position to cast, or control the casting of, more than 10% of the maximum number of votes that might be cast at a general meeting of Company A after the allocation of Restricted Shares under the Share Plan.

24. The Restricted Shares will be held in the Eligible Employee’s own name subject to an ASX Holding Lock until the Vesting Date.

25. The Board will only exercise its discretion to waive the Vesting Conditions or Vesting Period to lift the ASX Holding Lock in exceptional circumstances. For example, the Board may exercise its discretion in the event of the death of a participant. The Board has not exercised this discretion in relation to any of Company A’s employee share schemes in the last seven years.

26. The predominant business of Company A is not the acquisition, sale or holding of shares, securities or other investments.

27. The Share Plan is an effective salary sacrifice arrangement for the purposes of Taxation Ruling TR 2001/10 Income tax: fringe benefits tax and superannuation guarantee: salary sacrifice arrangements (TR 2001/10).

28. There will be no Eligible Employees participating in the Share Plan who are employed by more than one entity within the Group.

29. Company A has been incorporated for more than 10 years.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 83A-10(1)

Income Tax Assessment Act 1997 subsection 83A-10(2)

Income Tax Assessment Act 1997 subsection 83A-20(1)

Income Tax Assessment Act 1997 section 83A-30

Income Tax Assessment Act 1997 section 83A-33

Income Tax Assessment Act 1997 subsection 83A-45(1)

Income Tax Assessment Act 1997 subsection 83A-45(2)

Income Tax Assessment Act 1997 subsection 83A-45(3)

Income Tax Assessment Act 1997 subsection 83A-45(6)

Income Tax Assessment Act 1997 subsection 83A-105(1)

Income Tax Assessment Act 1997 subsection 83A-105(2)

Income Tax Assessment Act 1997 subsection 83A-105(3)

Income Tax Assessment Act 1997 section 83A-115

Income Tax Assessment Act 1997 subsection 83A-315(1)

Income Tax Assessment Act 1997 section 83A-330

Income Tax Assessment Act 1997 subsection 995-1(1)

Income Tax Assessment Act 1997 subdivision 960-S

Income Tax Assessment Regulations 1997 Regulation 83A-315.01

Income Tax Assessment Regulations 1997 Regulation 83A-315.03

Income Tax Assessment Regulations 1997 Regulation 83A-315.04

Taxation Administration Act 1953 Schedule 1 paragraph 392-5(1)(b)

Reasons for decision

Paragraph 392-5(1)(b) of Schedule 1 to the TAA 1953 provides that:

(1) An entity (the provider) must give a statement to the Commissioner and to an individual for a *financial year if:

…

(b) all of the following subparagraphs apply:

(i) the provider has provided ESS interests to the individual (whether during the year or during an earlier year);

(ii) Subdivision 83A-C of the Income Tax Assessment Act 1997 (about employee share schemes) applies to the interests;

(iii) the *ESS deferred taxing point for the interests occurs during the year.

Each of the requirements of paragraph 392-5(1)(b) of Schedule 1 to the TAA 1953 are considered below.

Subparagraph 392-5(1)(b)(i): The provider has provided ESS interests to the individual

Subsection 83A-10(1) of the ITAA 1997 provides that an ESS interest is a beneficial interest in either a share in a company or a right to acquire a share in a company.

A Restricted Share is a beneficial interest in a Company A Share. Therefore, subparagraph 392-5(1)(b)(i) of Schedule 1 to the TAA 1953 will be satisfied.

Subparagraph 392-5(1)(b)(ii): Subdivision 83A-C of the ITAA 1997 applies to the ESS interests

Subsection 83A-105(1) of the ITAA 1997 sets out the requirements that must be satisfied for Subdivision 83A-C of the ITAA 1997 to apply to an ESS interest:

(1) This Subdivision applies, and Subdivision 83A-B does not apply, to an ESS interest in a company if:

(a) Subdivision 83A-B would, apart from this section, apply to the interest (see section 83A-20); and

(aa) after applying section 83A- 315, there is still a discount given in relation to the interest; and

(ab) section 83A-33 (about start ups) does not reduce the amount to be included in your assessable income in relation to the interest; and

(b) subsections 83A-45(1), (2), (3) and (6) apply to the interest; and

(c) if the interest is a beneficial interest in a * share:

(i) subsection (2) of this section applies to the interest; and

(ii) subsection (3) or (4) applies to the interest; and

(d) if the interest is a beneficial interest in a right to acquire a beneficial interest in a share--subsection (3) or (6) applies to the interest.

Each of the requirements of subsection 83A-105(1) of the ITAA 1997 is considered below.

Paragraph 83A-105(1)(a):Subdivision 83A-B of the ITAA 1997 would, apart from section 83A-105 of the ITAA 1997, apply

Subsection 83A-20(1) of the ITAA 1997 provides that Subdivision 83A-B of the ITAA 1997 applies to an ESS interest if you acquire the interest under an employee share scheme at a discount.

Subsection 83A-10(2) of the ITAA 1997 explains that an employee share scheme is a scheme under which ESS interests in a company are provided to employees of the company or subsidiaries of the company in relation to their employment.

Under the Share Plan, Restricted Shares in Company A will be offered and provided to Eligible Employees of the Group. Therefore, the Share Plan is an employee share scheme for the purposes of subsection 83A-10(2) of the ITAA 1997.

The Restricted Shares are acquired by Eligible Employees for nil consideration. As Company A shares have a value of greater than nil, the Restricted Shares are acquired at a discount. Therefore Subdivision 83A-B of the ITAA 1997 would apply to the Restricted Shares but for the operation of section 83A-105 of the ITAA 1997.

Paragraph 83A-105(1)(aa): After applying section 83A-315 of the ITAA 1997, there is still a discount given in relation to the interest

Section 83A-30 of the ITAA 1997 provides that an ESS interest is taken to have been acquired by the employee for its market value (rather than its discounted value) to be calculated within the ordinary meaning of the term ‘market value’.

The ordinary meaning of ‘market value’ is the price that a willing but not anxious buyer would have to pay to a willing but not anxious seller for the item, Spencer v Commonwealth of Australia [1907] HCA 82. Market value has also been described as the best price that may reasonably be obtained for property if sold in the general market.

‘Market value’ is defined in subsection 995-1(1) of the ITAA 1997 as having a meaning affected by Subdivision 960-S of the ITAA 1997. The provisions in sections 960-405 to 960-415 of the ITAA 1997 do not affect the meaning of ‘market value’ in these circumstances.

Subsection 83A-315(1) of the ITAA 1997 provides that whenever Division 83A of the ITAA 1997 uses the market value of an ESS interest, instead use the amount specified in the Income Tax Assessment Regulations 1997 (ITA Regs) in relation to the interest, if the ITA Regs specify such an amount.

Regulation 83A-315.01 of the ITA Regs provides:

(1) For subsection 83A-315 of the Act, the amount, in relation to an unlisted right that must be exercised within 15 years after the day when the beneficial interest in the right was acquired is, at the choice of the individual:

(a) the market value of the right; or

(b) the amount determined by the application of regulations 83A-315.02 to 83A-315.09.

Regulation 83A-315.03 states that if the lowest amount that must be paid to exercise a right to acquire a beneficial interest in a share is nil or cannot be determined, the value of the right on a particular day is the same as the market value of the share on that day.

To avoid doubt, if an individual acquires the beneficial interest in a share or right, the value that is applicable for the purposes of this Division is the value of the share or right, not the value of the interest in the share or right, as per Regulation 83A-315.04 of the ITA Regs.

The number of Restricted Shares offered will be calculated by dividing the dollar value of an Eligible Employee’s Award by the volume weighted average closing price of Company A Shares traded on the ASX during the five trading days immediately preceding the grant date, rounded up to the nearest whole number of Restricted Shares.

The offer of Restricted Shares are in respect of the deferred component of employees’ short term variable remuneration, retention awards, sign-on awards and project awards and are granted free of charge. Therefore, the ESS interests have been acquired for nil consideration, at a discount equal to market value.

The provisions under section 83A-315 of the ITAA 1997 do not operate to affect the amount of discount given in relation to the interest. As such, there is still a discount given in relation to the Restricted Shares.

Paragraph 83A-105(1)(ab): Section 83A-33 of the ITAA 1997 (about start ups) does not reduce the amount to be included in your assessable income in relation to the interest

Section 83A-33 of the ITAA 1997 reduces amounts included in assessable income for start-up companies. Subsections 83A-33(2) to (6) of the ITAA 1997 set out all of the circumstances that must apply for section 83A-33 of the ITAA 1997 to be applicable:

● The company (and its corporate group) must not have any interests listed on an approved stock exchange in the income year prior to the ESS interest being offered;

● The company (and its connected entities) must have been incorporated for less than 10 years; and

● The company that grants the ESS interests must have an aggregated turnover of less than $50 million in the income year prior to the year the interests are granted;

● The employing company (which can be a subsidiary of the company granting the ESS interests are being offered) must be an Australian resident taxpayer.

● For start-ups to be eligible for the start up concession, ESS interests that are beneficial interests in a share must be acquired at a discount of no more than 15% of its market value when it is acquired. In relation to ESS interests that are a beneficial interest in a right to a share, the amount that must be paid to exercise the right is greater than or equal to the market value of an ordinary share in the company when it is acquired.

Company A is not a start-up company for the purposes of section 83A-33 of the ITAA 1997 as the company is listed on the ASX, and has been incorporated for more than 10 years. Therefore, paragraph 83A-105(1)(ab) of the ITAA 1997 has no application.

Paragraph 83A-105(1)(b): Subsection 83A-45(1), (2), (3) and (6) of the ITAA 1997 apply to the interest

Subsection 83A-45(1) of the ITAA 1997 applies to ESS interests in a company if the participant is employed by the company or a subsidiary of the company when they acquire the interest.

Under the Share Plan, Restricted Shares will only be granted to participants who are “Eligible Employees” as per the Plan Rules. Eligible Employees are defined in the Offer booklet as an employee of the Group. Therefore, this requirement will be satisfied.

Subsection 83A-45(2) applies to an ESS interest acquired under an employee share scheme if, when the shares are acquired, all the ESS interests available for acquisition under the scheme relate to ordinary shares.

The Restricted Shares available under the Share Plan are ordinary shares in Company A, satisfying the requirements of subsection 83A-45(2) of the ITAA 1997.

Subsection 83A-45(3) of the ITAA 1997 applies to an ESS interest in a company unless when you acquire the interest the predominant business of the company is the acquisition, sale or holding of shares, securities or other investments, and you are an employee of the company as well as another company that is a subsidiary of the first company, a holding company of the first company or a subsidiary of a holding company of the first company.

The predominant business of Company A is not the acquisition, sale or holding of shares, securities or other investments. Further, there are no participants who are employed by more than one entity within the Group. Therefore, the requirements under subsection 83A-45(3) of the ITAA 1997 are satisfied.

Subsection 83A-45(6) of the ITAA 1997 applies to an ESS interest in a company if, immediately after acquiring the interest, the participant does not hold a beneficial interest in more than 10% of the shares of the company, and they are not in a position to cast more than 10% of the maximum number of votes that may be cast at a general meeting of the company.

No Eligible Employee participating in the Share Plan will hold a beneficial interest in more than 10% of the shares in Company A, or be in a position to cast, or control the casting of, more than 10% of the maximum number of votes that might be cast at a general meeting of Company A after the allocation of Restricted Shares under the Share Plan. Therefore, the requirement under subsection 83A-45(6) of the ITAA 1997 is satisfied.

As subsections 83A-45(1), (2), (3) and (6) of the ITAA 1997 all apply to the Restricted Shares, paragraph 83A-105(1)(b) of the ITAA 1997 is satisfied.

Subparagraph 83A-105(1)(c)(i): If the interest is a beneficial interest in a share, subsection 83A-105(2)of the ITAA 1997 applies to the interest.

As the Restricted Shares available under the Share Plan are a beneficial interest in a share, rather than a right, the condition in paragraph 83A-105(1)(c) of the ITAA 1997 applies and the condition in paragraph 83A-105(1)(d) of the ITAA 1997 does not apply.

The condition in subsection 83A-105(1)(c) of the ITAA 1997 requires that if the interest is a beneficial interest in a share, subsection (2) of this section applies to the interest, and either subsection (3) or (4) of this section applies to the interest.

Subsection 83A-105(2) of the ITAA 1997 applies to an ESS interest acquired under an ESS if when an Eligible Employee acquires the interest, at least 75% of the permanent employees who have completed at least three years of service (whether continuous or non-continuous) with the employer and who are Australian residents are, or at some earlier time had been, entitled to acquire ESS interests under the scheme, or ESS interests in the employer or a holding company of the employer under another ESS.

This requirement is satisfied through the other employee share plans offered by Company A.

Subparagraph 83A-105(1)(c)(ii): If the interest is a beneficial interest in a share, subsection 83A-105(3) or 83A-105(4) of the ITAA 1997 applies to the interest

Subsection 83A-105(3) of the ITAA 1997 applies to ESS interests acquired under an ESS scheme if there is a real risk that, under the conditions of the scheme, the interest in the scheme will be forfeited or lost.

The Explanatory Memorandum to the Tax Laws Amendment (2009) Budget Measures No. 2) Bill 2009 provides that the ‘real risk of forfeiture’ test does not require employers to provide schemes in which their employee share scheme benefits are at a significant or substantial risk of being lost. However, ‘real’ is regarded as something more than a mere possibility.

Further, ATO Interpretative Decision ATO ID 2010/61 Income Tax: Employee share scheme: real risk of forfeiture – minimum term of employment and good leaver provisions (ATO ID 2010/61) states that “in considering whether a condition in a scheme imposes a real risk of forfeiture, regard should be had to whether a reasonable person would consider that there is a genuine connection between the forfeiture condition and aligning the interests of the employee and employer. If the risk of forfeiture is over a very short period of time to gain access to a relatively long period of deferral, the risk will not be considered real.”

The Restricted Shares under the Share Plan may be forfeited in the event of:

● cessation of the Eligible Employee’s employment by being summarily terminated or resigning

● the Eligible Employee retiring within six months of the grant of the Restricted Shares

● a Change of Control Event where there is either a Takeover Bid of Shares, or other transaction, event or state of affairs that in the Board’s opinion is likely to result in, or should otherwise be treated as, a change in Control of the Company

● the Eligible Employee contravenes the dealing restrictions, and

● the Eligible Employee notifying Company A in writing that they elect to surrender their Restricted Shares.

The Restricted Shares may also be forfeited to prevent the Eligible Employee from becoming entitled to any inappropriate benefits.

The fact that an Eligible Employee who retires in accordance with Company A’s Retirement Policy who is considered to be a ‘good leaver’ will have their Restricted Shares remain on foot and vest in the ordinary course does not affect the existence of a real risk of forfeiture, as the post cessation discretions mean that an Eligible Employee commencing employment with another employer following retirement or having a change in circumstances that means it is no longer appropriate to retain benefits allows the Board to forfeit the Restricted Shares.

The circumstances in which the Restricted Shares may be forfeited under the Share Plan mean that an Eligible Employee who retires within six months of the grant date, resigns or is summarily terminated will always forfeit their Restricted Shares.

As cessation of employment other than as a good leaver always results in the forfeiture of the Restricted Shares, and the post cessation discretions under the Plan Rules mean that the risk of forfeiture remains beyond an Eligible Employee’s duration of employment by the Group, the real risk of forfeiture requirement will be satisfied.

Based upon the above analysis, Subdivision 83A-C of the ITAA 1997 applies to the ESS interests and the requirement in subparagraph 392-5(1)(b)(ii) of Schedule 1 to the TAA 1953 is satisfied.

Subparagraph 392-5(1)(b)(iii): the ESS deferred taxing point for the interests occurs during the year

In relation to the ESS deferred taxing point for a share, section 83A-115 of the ITAA 1997 provides:

(1) This section applies if the * ESS interest is a beneficial interest in a * share.

Meaning of ESS deferred taxing point

(2) The ESS deferred taxing point for the * ESS interest is the earliest of the times mentioned in subsections (4) to (6).

(3) However, the ESS deferred taxing point for the * ESS interest is instead the time you dispose of the interest, if that time occurs within 30 days after the time worked out under subsection (2).

No restrictions on disposing of share

(4) The first possible taxing point is the earliest time when:

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

(b) if, at the time you acquired the interest, the scheme genuinely restricted you immediately disposing of the interest--the scheme no longer so restricts you.

Cessation of employment

(5) The 2nd possible taxing point is the time when the employment in respect of which you acquired the interest ends.

Maximum time period for deferral

(6) The 3rd possible taxing point is the end of the 15 year period starting when you acquired the interest.

As per subsection 83A-115(2) of the ITAA 1997, the ESS deferred taxing point for an ESS interest that is a beneficial interest in a share is the earliest of the times set out in subsections 83A-115(4) to (6) of the ITAA 1997.

The deferred taxing point under Subsection 83A-115(4) of the ITAA 1997 will be the first time that the participant can deal with their shares after they vest, where there is no real risk of forfeiture or losing the ESS interest (other than by disposing of it) and all genuine disposal restrictions have ended.

The deferred taxing point under Subsection 83A-115(5) of the ITAA 1997 will occur if the participant ceases employment with the Group.

The deferred taxing point under Subsection 83A-115(6) of the ITAA 1997 will be the maximum time period for deferral and will occur fifteen years from when the Restricted Shares are granted to the participant.

As per Subsection 392-5(1)(b) of Schedule 1 to the TAA, in relation to Restricted Shares granted under the Share Plan, Company A must give a statement to the Commissioner and to an individual in the year the deferred taxing point for the interest occurs.

The deferred taxing point will occur when the earliest of the following events occurs:

● The first time that the participant can deal with their shares after they vest and all genuine disposal restrictions on the Restricted Shares cease to apply,

● The participant ceases employment with the Group within the meaning of section 83A-330 of the ITAA 1997,

● 15 years from when the Restricted Shares are granted to a participant.