Edited version of private advice

Authorisation Number: 1051520644872

Date of advice: 28 May 2019

Ruling

Subject: Employee share schemes

Question

For the purpose of the Company complying with its reporting obligations under section 392-5 of Schedule 1 to the Taxation Administration Act 1953 (TAA), will the Company have a reporting obligation in the 2019 income year for each ESS interest that is exercised or assigned by an eligible employee during the 2019 income year?

Answer

Yes

This ruling applies for the following period

The year ending 30 June 2019

The scheme commences on

1 July 2018

Relevant facts and circumstances

1.       The Company is an Australian Resident unlisted public company.

2.       The Company has entered into an arrangement involving the grant of options to eligible executives and directors of the Company (eligible employees) in accordance with the rules of the Company Employee Option Plan (EOP).

3.       The EOP constitutes an employee share scheme (ESS) within the meaning of subsection 83A-10(2) of the Income Tax Assessment Act 1997 (ITAA 1997).

4.       The eligible employees are residents of Australia for tax purposes.

5.       Options were issued to eligible employees for no consideration.

6.       Each Option entitles the holder to subscribe for one ordinary share in the Company at the relevant exercise price.

7.       A number of the Options have vested during the 2019 income year.

8.       None of the Options have been exercised.

9.       Once the Options vest, there is no risk of loss or forfeiture of the Options (other than by allowing them to lapse).

10.    There is a restriction on the disposal of the Options, whether vested or unvested. The Options may not be assigned, transferred, encumbered with a security interest or otherwise disposed of by the eligible employees. The EOP rules allow an Executive in very limited circumstances to assign their Options before their exercise subject to the sole and absolute discretion of the Board.

11.    There is no risk of loss or forfeiture of the share acquired as a result of exercising the Option (other than by disposal).

12.    Unless otherwise determined by the Board, any unexercised Options will lapse and become incapable of being exercised at the earlier of:

a.     When the eligible employee ceases to be an eligible employee, and

b.     Three calendar years after the vesting date for the Options.

13.    The eligible employees will exercise their vested Options prior to 30 June 2019. They will not dispose of the shares acquired by exercising their Options within 30 days after exercising the Options.

14.    The eligible employees will remain employed until after the exercise of the Options.

15.    Immediately after acquiring the Options the eligible employees do not hold a beneficial interest in more than 10% of the shares in the Company, or Options that would allow them to acquire more than 10% of the shares in the Company if exercised, nor on the same basis were they 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 the Company.

16.    Subdivision 83A-C of the ITAA 1997 applies to the Options.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 Subdivision 83A-B

Income Tax Assessment Act 1997 Subdivision 83A-C

Income Tax Assessment Act 1997 section 83A-10

Income Tax Assessment Act 1997 section 83A-15

Income Tax Assessment Act 1997 section 83A-20

Income Tax Assessment Act 1997 section 83A-105

Income Tax Assessment Act 1997 section 83A-110

Income Tax Assessment Act 1997 section 83A-120

Income Tax Assessment Regulations 1997 Regulation 83A-315

Taxation Administration Act 1953 Schedule 1 section 392-5

Reasons for decision

All references are to the Income Tax Assessment Act 1997 unless otherwise stated.

Question 1

Summary

17.    The reporting obligation will arise at the earliest of the time of the exercise of the vested Option or upon assignment of the Option prior to exercise.

Detailed reasoning

18.    Section 392-5(1) relevantly states:

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.

19.    For deferred taxing points, paragraph 392-5(3)(e) relevantly provides that the statement must include:

(i) the number of the interests;

(ii) the amount paid, after the time of acquisition but not after the *ESS deferred taxing point, towards acquiring the interests;

(iii) the provider ' s estimate of the market value of the interests at the ESS deferred taxing point;

(iv) the amount of TFN withholding tax (ESS) paid or payable by the provider in respect of the interests during the year.

20.    Division 83A broadly provides for the taxation of employee share scheme interests acquired at a discount. The discount received on interests acquired under an ESS will generally be included in the recipient's assessable income of the income year in which the interests are acquired unless certain conditions are met and there is either a real risk of forfeiture or the interests are acquired under an arrangement where the schemes rules state that the Subdivision applies. Where such conditions are met, the recipient's taxing point may be deferred (see Subdivision 83A-C).

21.    Section 83A-20 provides that Subdivision 83A-B applies if an ESS interest is acquired under an employee share scheme and at a discount. However, Subdivision 83A-B will not apply and Subdivision 83A-C will apply if subsection 83A-105(1) applies

22.    Subsection 83A-105(1) will only apply to ESS interests which are rights in situations where, pursuant to paragraph 83-105(1)(d), subsection (3) or (6) of section 83A-105 applies. Subsection (6) concerns ESS interests acquired under an arrangement where the schemes rules state that the Subdivision applies and is not applicable here. Thus subsection (3) must be met for subsection 83A-105(1) to apply.

23.    Subsection 83A-105(3) relevantly provides that subsection 83A-105 applies to an ESS interest you acquire under an employee share scheme if, when you acquire the interest, there is a real risk that, under the conditions of the scheme, you will forfeit or lose the ESS interest, other than by disposing of it, exercising it, or letting it lapse.

24.    Based upon the vesting conditions that apply there is a real risk under the conditions of the scheme that the eligible employees will forfeit or lose the Option/s, other than by disposing of it, exercising it, or letting it lapse.

25.    Subsection 83A-110(1) provides that:

Your assessable income for the income year in which the *ESS deferred taxing point for the *ESS interest occurs includes the*market value of the interest at the ESS deferred taxing point, reduced by the *cost base of the interest.

26.    Subsection 83A-120(2) relevantly provides that the ESS deferred taxing point for rights to acquire shares is the earliest of:

a.     when there is no real risk that the ESS interest will be forfeited or lost other than by disposing of it, and there are no restrictions on you disposing of the ESS interest (subsection 83A-120(4)),

b.     when the employment in respect of which the interest was acquired ends (subsection 83A-120(5)),

c.      the end of the 15 year period starting when the ESS interest was acquired (subsection 83A-120(6)), or

d.     when the right is exercised and there is no risk that the resulting beneficial interest in the share will be forfeited or lost (other than by disposing of it) (subsection 83A-120(7)).

27.    However, subsection 83A-120(3) provides that if the beneficial interest in the share acquired as a result of exercising a right is disposed of within 30 days after the occurrence of the time worked out under subsection (2), then the ESS deferred taxing point is instead the time you disposed of the beneficial interest in the share.

28.    The shares acquired as a result of exercising the Options will not be disposed of within 30 days after the occurrence of a time worked out under subsection 83A-120(2).

29.    According to the facts provided, the earliest of these times will be the earlier of the following:

a.     the time the Option is exercised - in such a case, the ESS deferred taxing point will be the time the Option is exercised, pursuant to subsection 83A-120(7), or

b.     the time when the Board allows the Option to be transferred to another party - in such a case, there is no longer a real risk that you will forfeit or lose the ESS interest and there is no restriction on disposal, thus giving rise to an ESS deferred taxing point under subsection 83A-120(4).

30.    If the above occurs in relation to Options held by an eligible employee, then under section 392-5, the Company has an obligation to make a statement to the Commissioner and to the relevant eligible employee in relation to the 2019 financial year as:

a.     the Company has provided ESS interests to the eligible employee during an earlier income year,

b.     Subdivision 83A-C applies to the Options, and

c.      The ESS deferred taxing point for the interests occurs during the year.