Edited version of private advice

Authorisation Number: 1051524914920

Date of advice: 7 June 2019

Ruling

Subject: Employee share schemes

Question 1

Did the issue of Options by the Company to the Trust during the 2017 income year give rise to an assessable amount to the Director for the 2017 income year under section 83A-25 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Will the Commissioner accept that the discount given in relation to each Option issued to the Trust during the 2017 income year was $Z for the purposes of subsection 83A-25(1) of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period

The year ending 30 June 2017

The scheme commences on

1 July 2016

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 in accordance with the rules of the Company Option Plan (OP).

3.   The OP 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 individual (the Director) is an executive of the Company.

5.   The Director is a resident of Australia for tax purposes.

6.   The vesting dates and exercise price of the options granted under the OP (the Options) have been determined at the sole discretion of the board of the Company (the Board).

7.   During the 2017 income year, Options were offered to the Director for no consideration.

8.   The Director accepted the offer and nominated his associate, the Trust, to acquire the Options upon their issue (as allowed for in the OP rules).

9.   On XXXX, the Options were issued by the Company to the Trust.

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

11.    None of the Options have been exercised.

12.    The Options have an exercise price of $Y and will vest on YYYY.

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

14.    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 Director, unless authorised by the board of the Company (the Board) and only in very limited circumstances.

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

16.    Any unexercised Options will lapse and become incapable of being exercised at the earlier of:

a.     When the Director ceases to be involved in the management of the Company, and

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

17.    An independent professional valuation (Option Valuation) has assessed the total market value of the Options as at XXXX (being the time of issue of the Options to the Director) as being $Z per Option.

18.    As at XXXX, the Director and Company A beneficially owned greater than 10% of the ordinary shares on issue in the Company.

19.    Company A is an Australian resident company with the majority of its shareholdings held by the Director and his relatives.

20.    All of the above classes of shares in Company A carry identical rights, including voting rights.

21.    The Director did not include an amount in his income tax return for the 2017 income year referrable to the Options he acquired on XXXX.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 318

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-105

Income Tax Assessment Act 1997 section 83A-20

Income Tax Assessment Act 1997 section 83A-25

Income Tax Assessment Act 1997 section 83A-305

Income Tax Assessment Act 1997 section 83A-45

Income Tax Assessment Regulations 1997 Regulation 83A-315

Reasons for decision

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

Question 1

Summary

22.    The issue of the Options by the Company to the Trust on XXXX gives rise to an assessable amount to the Director for the 2017 income year under section 83A-25 of the ITAA 1997.

Detailed reasoning

23.    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 your 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, your taxing point may be deferred (see Subdivision 83A-C).

24.    Subsection 83A-20(1) provides that Subdivision 83A-B applies if you acquire an ESS interest under an employee share scheme at a discount; however, Subdivision 83A-B will not apply and Subdivision 83A-C will apply if subsection 83A-105(1) applies

25.    Section 83A-305(1) provides that if an associate of an individual acquires an ESS interest in relation to the individual's employment, then, for the purposes of Division 83A, the ESS interest is treated as having been acquired by the individual rather than the associate. Thus, the Director is taken to have acquired the Options rather than the Trust.

26.    Pursuant to subsection 83A-20(1), Subdivision 83A-B will apply to the acquisition of the Options by the Director as they are ESS interests acquired under an employee share scheme at a discount unless subsection 83A-105(1) applies.

27.    Subsection 83A-105(1) will only apply to ESS interests which are rights in situations where, amongst other things, subsections 83A-45(1), (2), (3) and (6) apply to the interests pursuant to paragraph 83A-105(1)(b).

28.    Subsection 83A-45(6) applies:

... to an *ESS interest in a company if, immediately after you acquire the interest:

(a) you do not hold a beneficial interest in more than 10% of the*shares in the company; and

(b) you are not in a position to cast, or to control the casting of, more than 10% of the maximum number of votes that might be cast at a general meeting of the company.

29.    Subsection 83A-45(7) states:

For the purposes of subsection (6), you are taken to:

(a) hold a beneficial interest in any *shares in the company that you can acquire under an *ESS interest that is a beneficial interest in a right to acquire a beneficial interest in such shares; and

(b) be in a position to cast votes as a result of holding that interest in those shares.

30.    Section 83A-305(2) states:

For the purposes of subsections 83A-45(6) and (7), subsection (1) of this section also applies if the *associate acquired the *ESS interest otherwise than in relation to the individual's employment.

31.    Paragraph 1.61 of the Explanatory Memorandum to the Tax and Superannuation Laws Amendment (Employee Share Schemes) Bill 2015 clarifies the application of subsection 83A-45(6) by explaining that:

The interest provided to an employee must not result in the employee (along with their associates) having effective ownership of greater than 10 per cent of their employer, and not controlling more than 10 per cent of the maximum voting rights in the employer. [Schedule 1, item 11, subsection 83A-45(6)]

(emphasis added)

32.    Subsection 318(1) of the ITAA 1936 relevantly defines an associate of an entity, being a natural person, as including a company where the majority voting interest in the company is held by the entity and/or their relatives.

33.    The Director and his associates held the majority voting interest in Company A at XXXX. Thus they had a majority voting interest in Company A and Company A was an associate of the Director at that time.

34.    Consequently, for the purposes of subsection 83A-45(6), the Director held a beneficial interest in greater than 10% of the shares in the Company immediately after he acquired the Options.

35.    Therefore, subsection 83A-45(6), and thus subsection 83A-105(1), was not satisfied and Subdivision 83A-C does not apply to the acquisition of the Options.

36.    Accordingly, pursuant to section 83A-20, subdivision 83A-B applies to the acquisition of the Options by the Director.

37.    Within Subdivision 83A-B, section 83A-25(1) states:

Your assessable income for the income year in which you acquire the*ESS interest includes the discount given in relation to the interest.

Note: Regulations made for section 83A-315 may be relevant to working out whether you acquire the ESS interest at a discount.

38.    Pursuant to section 83A-25, the Director's assessable income for the 2017 income year should include the discount given in relation to the acquisition of Options by the Trust.

Question 2

Summary

39.    The Commissioner accepts that the discount given in relation to each Option issued to the Director on XXXX for the purposes of subsection 83A-25(1) of the ITAA 1997 was $Z.

Detailed reasoning

40.    As the Director acquired the Options for no consideration, the discount given in relation to the ESS options is equal to their market value at the time of their acquisition.

41.    Subsection 83A-315 provides that for the purposes of Division 83A whenever the market value of an ESS interest is used, to use instead the amount specified in the Income Tax Assessment Regulations 1997 (ITAR 1997).

42.    Regulation 83A-315.01 of the ITAR 1997 relevantly states:

(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 date 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.

43.    For the purposes of paragraph 83A-315.01(1)(a) of the ITAR 1997, and thus subsection 83A-25(1) of the ITAA 1997, the Commissioner accepts that the market value of each Option at the time of acquisition by the Trust was $Z as given in the provided Option Valuation.