| Disclaimer This edited version has been archived due to the length of time since original publication.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: 1051499327766
Date of advice: 27 March 2019
Advice
Subject: Minimum holding period
Question
Will the Commissioner allow the minimum holding period for ESS interests to be reduced in accordance with sub-paragraph 83A-45(5)(a)(ii) of the ITAA 1997?
Answer
Yes. For the purposes of section 83A-45(4) of the ITAA 1997, the Commissioner will exercise his discretion under sub-paragraph 83A-45(5)(a)(ii) to allow the minimum holding period for all Options, if any, that qualify for concessional treatment under section 83A-33 to be reduced. The Commissioner will allow the minimum holding period to be the period starting when the Options were acquired and ending at the date on which the Options were cancelled in connection with a 100% acquisition of the Shares in the taxpayer (the Company).
Detail reasoning
Beginning in April 20XX the Company has made grants of Options to participants that were intended to qualify for the start-up concessions under Subdivision 83A-B of the ITAA 1997.
The Company has stated that at all times the Company has operated the Plan in accordance with the Plan Rules such that all Options and Shares would not be permitted to be disposed of during the minimum holding period in accordance with the requirement in subsections 83A-45(4) and 83A-45(5) of the ITAA 1997.
In May 20YY the Company received an initial offer to acquire 100% of the membership interests in the Company from an entity, this offer was not accepted. In November 20YY, the Company's Board accepted a further non-binding indicative offer from the entity (the Purchaser) in respect of an acquisition of the Company.
All of the issued shares in the Company were sold to the Purchaser, which has acquired 100% of the membership interests in the Company on completion of the transaction.
Upon the sale of the shares in the Company to the Purchaser, the Company cancelled all outstanding Options granted to participants in exchange for their Fair Market Value.
The cancellation of the Options in connection with completion fell within three years of the grant of all Options issued under the Plan.
The Company has requested that the Commissioner exercise his discretion under section 83A-45(5) of the ITAA97 to allow the minimum holding period for all Options granted under the Plan to be reduced, such that the Options can be cancelled at the earlier time in connection with the completion of the transaction without breaching the minimum holding period condition.
In order to qualify for the ESS start–up concessions under section 83A-33, the options must meet all of the conditions set down in subsection 83A-33(1).
One of the conditions is the minimum holding period condition detailed in subsections 83A-45(4) and 83A-45(5).
83A-45(4)
The minimum holding period condition is satisfied if the scheme is operated so that every acquirer of an ESS interest (the scheme interest) under the scheme is not permitted to dispose of:
(a) the scheme interest; or
(b) a beneficial interest in a share acquired as a result of the scheme interest;
during the scheme interests minimum holding period.
83A-45(5)
An ESS interest’s minimum holding period is the period starting when the interest is acquired under the employee share scheme and ending at the earlier of:
(a) 3 years later, or such earlier time as the Commissioner allows if the Commissioner is satisfied that:
(i) the operators of the scheme intended for subsection (4) to apply to the interest during the 3 years after the acquisition of the interest; and
(ii) at the earlier time that the Commissioner allows all membership interests in the relevant company were disposed of under a particular scheme:
(b) when the acquirer of the interest ceases being employed by the relevant employer.
Provided that all the membership interests in the company are acquired under the takeover as stated by the Company then the only remaining consideration is whether the operators of the scheme intended for subsection (4) to apply to the interest during the three years after the acquisition of the interest.
The operators of the scheme would fail the test if they had either allowed a Participant to dispose of their interest prior to the end of its minimum holding period or there was objective evidence that the scheme was not operated to prevent the participants from doing so.
As the rules of the Plan specifically prevent disposals under these circumstances and there is no evidence that any such disposal has been allowed the only remaining consideration is whether there was objective evidence that the scheme was not operated to prevent the participants from disposing of their interests before the end of the minimum holding period.
Objectively the Commissioner would not accept that that the scheme was operated to prevent the Participants from disposing of their interests before the end of the minimum holding period where interests were allocated after the time that it became clear that a takeover was imminent.
As the evidence indicates that this is not the case the Commissioner will exercise his discretion to allow the reduced minimum holding period to apply.