Edited version of private advice

Authorisation Number: 1051582079082

Date of advice: 23 September 2019

Ruling

Subject: Employee share schemes

Question 1

Is there any relief or protection offered to the taxpayer under Employee share scheme (ESS) rules if the taxpayer is not aware of the tax consequences at the time of receiving employee shares when the impact of receiving these shares has materially affected the taxpayer's tax liability position?

Answer

No.

Question 2

In a situation where the market value of employee shares drops so significantly after the taxing point that it adversely affects the taxpayer's ability to pay the tax liability that has occurred - is the taxpayer offered any relief under section 83A-310 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following period:

20XX-XX income year

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The taxpayer has received an ESS statement from the employer advising that certain amounts were assessable under the ESS provisions:

·         12D: Discount from taxed upfront schemes - eligible for reduction

·         12F: Discount from deferral schemes

The ESS statement provided additional information explaining the calculations contained in it.

The taxpayer believes the overall consequence of receiving these shares was poorly managed by the employer. In particular (given the large value of shares issued) there was a lack of communication and education from the employer around the significant tax consequences such a large parcel of shares would have on the taxpayer personally.

The timeline of events in regards to the larger parcel of shares received are:

·         First - Received the 'Notice of Disbursement' letter and the notification that these shares will be deposited to the taxpayer's account shortly

·         Second - Shares allocated into a securities custody account created for the taxpayer

·         Third - Email from company HR that the accountants would be working on ESS statements

·         Fourth - Received from company HR the 2018 ESS statement for Australian income tax return

·         Fifth - A meeting was organised with the accountants to discuss the Australian tax treatment of the LTIP scheme and to understand how the reportable income was calculated for the 2018 ESS reporting.

The Notice of Disbursement letter advised the number of shares that the taxpayer would be receiving under the two elements of the Plan (and explained how these numbers of shares were calculated).

Reference in the email was made to the foreign exchange rates used in the calculations.

Other than this correspondence, there was very little other information provided other than blanket emails more directed at foreign citizens around the scheme (the bulk of the company's global workforce). Once the shares were allocated there was little discussed as the participants were unknown between employees and nothing was mentioned by local HR who were coordinating the scheme at the local level.

The issue of the ESS statements was the first real discussion around tax and this was just in the form of the two emails mentioned above (two months after the share issue). These emails stated that the accountants would be issuing a statement around the shares, and once issued there was no discussion about what this meant to the participants (approximately ten people).

It was only through pressure by the participants and the substantial drop in share price that the company engaged the accountants to come in and explain the tax implications. And it was only during this meeting that the participants truly understand the real tax liability that all were facing. The accountants were very apologetic and at the meeting explained the one month tax free period after allocation. At which point all participants were quite vocal about the fact that they were never informed about this and that most would have exercised the right to sell at that point.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 Section 83A-115

Income Tax Assessment Act 1997 Section 83A-310

Reasons for decision

Summary - Question 1

There is no relief or protection offered to the taxpayer under ESS rules due to the taxpayer not being aware of the tax consequences at the time of receiving employee shares and the impact of receiving these shares materially affecting the taxpayer's tax liability position.

Detailed reasoning

Shares form part of the taxpayer's remuneration if they are granted to the taxpayer in relation to the taxpayer's employment and at a discount to their market value.

The ESS provisions are used to work out:

·         When the taxpayer needs to include this discount in his assessable income, and

·         The amount of the discount.

The ESS provisions also alter the capital gains consequences to ensure that there is no double-taxation. In effect, the ESS shares become an investment asset (and subject to the capital gains provisions) once the remuneration aspect is complete.

To achieve this outcome, the ESS provisions objectively consider the operation of the particular Employee share plan and whether the shares are at a real risk of forfeiture (among other conditions) in determining when the discount is to be assessable as remuneration - at the grant date or the deferred taxing point.

For shares that qualify for tax deferral, the deferred taxing point is established from the ending of the real risk of forfeiture and genuine selling restrictions (unless employment ends or the maximum deferral period is reached first).

The ESS provisions are concerned only with the taxpayer's ownership rights as described above. The ESS provisions ignore the effect of any defect or inadequacy in the operation of an ESS that doesn't affect the Taxpayer's ownership rights.

Likewise, the ESS provisions don't consider any deficiencies in the provision of information to the Taxpayer.

The information provided to the taxpayer by the employer means that the ESS provisions apply in the following manner:

·         ESPP

-        The taxpayer was granted shares in relation to the taxpayer's employment at a discount to their market value

-        These shares were granted under an ESS that meets the reduction conditions - they are assessable at the grant date

·         Loyalty shares

-        The taxpayer was granted shares in relation to the taxpayer's employment at a discount to their market value

-        These shares were granted under an ESS that meets the reduction conditions - they are assessable at the grant date

·         LTIP - Australia

-        The taxpayer was granted shares in relation to the taxpayer's employment (before 1 July 2015) at a discount to their market value

-        These shares were granted under an ESS that meets the deferral conditions and therefore the taxing point was to be deferred until the 'deferred taxing point'

-        The deferred taxing point happened to some of these shares during the 20XX-XX income year

The LTIP shares are the sum of all of the shares from the first element and most of the second element shares. The remainder of the second element shares that are subject to the two-year lock-up period were not reported as being assessable in the 20XX-XX income year.

Summary - Question 2

The taxpayer is not offered any relief under section 83A-310 of the ITAA 1997 in a situation where the market value of employee shares drops so significantly after the taxing point that it adversely affects the taxpayer's ability to pay the tax liability that has occurred.

Detailed reasoning

A primary condition for the operation of section 83A-310 of the ITAA 1997 is that the taxpayer has forfeited the shares that were granted under the ESS. This condition has not been satisfied because the taxpayer still owns the shares.

The drop in the market value of the shares is not a relevant factor in favour of the operation of section 83A-310 of the ITAA 1997. In fact, it would be a factor against the application of section 83A-310 of the ITAA 1997 if the ESS had contained conditions that protected the taxpayer against a fall in the market value of the shares.

Effectively, the taxpayer is in the same position as any shareholder who bought shares in their employer on the market (unrelated to their employment) and those shares subsequently drop in value.