Edited version of private advice

Authorisation Number: 1051627683926

Date of advice: 20 January 2020

Ruling

Subject: Employee share scheme

Question:

Are the amounts shown on the Employee Share Scheme Statements in relation to the 2016-17 and 2017-18 income years assessable in those income years respectively?

Answer:

No. However, the deferred taxing point in relation to the relevant employee share scheme interests occurred at a later date during the 2018-19 income year, which would have occurred at least by the time, or on the date, you ceased employment with Company A.

This ruling applies for the following periods

Income year ending 30 June 2017

Income year ending 30 June 2018

The scheme commences on

1 July 2016.

Relevant facts and circumstances

You are an Australian resident who was employed by Company A which was part of a group of companies, being Group X.

You participated in a number of employee share schemes (ESSs) and were granted ESS interests under deferral schemes as follows:

·         ESS 1 under which you were granted rights that entitled you to fully paid ordinary shares. In accordance with this scheme the Board could determine when a restriction period would apply and the shares could not be disposed of or otherwise dealt with while they were restricted shares

·         ESS 2 under which you were granted rights. In accordance with this scheme a participant could not dispose of shares until they held a minimum shareholding as determined by the Board.

You were advised by a representative of Company A that you were required to hold a specified number of shares, or vested rights, and that you could not dispose of your shares if the disposal resulted in you holding less than the specified number.

You received ESS statements for the 2016-17 and 2017-18 income years which show ESS discounts being assessable at the respective vesting dates.

You recorded the ESS discount amount in your 2016-17 and 2017-18 assessments in accordance with the amounts provided on the ESS statements.

After the rights had vested you held less than the minimum shareholding as required. While you also held a number of ordinary shares in Company A your total number of shares was less than the minimum shareholding required to enable you to sell any shares.

Group X was placed under Administration.

Your employment with Company A ceased during the following month.

Group X went into Liquidation after a number of months.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 Section 83A-120

Reasons for decision

Summary

The deferred taxing point did not occur during either the 2016-17 or 2017-18 income years in relation to your ESS interests which had vested during those income years.

Detailed reasoning

The ESS provisions are contained in Division 83A of the Income Tax Assessment Act 1997 (ITAA 1997).

In summary, the ESS provisions recognise the dual nature of grants of shares or rights to acquire shares (collectively ESS interests) as both a component of an employee's remuneration package and also as an ongoing investment. To this end, the ESS provisions provide a mechanism for recognising an appropriate value for remuneration purposes and an adjustment to the purchase price for investment purposes to reflect the amount treated as remuneration.

The ESS provisions achieve this outcome by determining:

·         When a taxpayer needs to include any discount received in relation to ESS interests in their assessable income, and

·         The amount of the discount.

For the ESS interests that are the subject of this private ruling, the amount of the discount is worked out and is assessable at the deferred taxing point.

The deferred taxing point for ESS interests that are rights to acquire shares is determined in accordance with section 83A-120 of the ITAA 1997 (as applicable to ESS interests granted between 1 July 2009 and 30 June 2015) as the earliest of the following:

·         The earliest time that there are no selling restrictions on the rights

·         Cessation of the Taxpayer's employment

·         Seven years from the grant date, or

·         The earliest date that all of the following conditions are met:

-        The forfeiture conditions on the rights end

-        Any exercise restrictions end (if there were some when they were granted)

-        Any forfeiture conditions on the shares acquired by exercising the rights end, and

-        Any selling restrictions on the shares acquired by exercising the rights end.

Section 83A-120 of the ITAA 1997 changed in relation to ESS rights granted after 1 July 2015 as follows:

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

·         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)),

·         When the employment in respect of which the interest was acquired ends (subsection 83A-120(5)),

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

·         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)).

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.

Application to your situation

You participated in ESSs offered by your employer and were granted ESS interests in various years.

Company A issued ESS Statements in relation to the 2016-17 and 2017-18 income years outlining that an ESS discount amount should be recorded in your assessment for each income year in relation to your ESS interests.

Company A had reported that the deferred taxing point had occurred on the respective vesting dates for the ESS interests in accordance with Example 12 on the web page titled 'ESS - Genuine disposal restrictions and deferred taxing points (which can be accessed using quick code QC 27241 in the Search bar in the ATO web site).

The advice you received from Company A's representative that you could not sell your ESS interests unless you held a specified number of shares constitutes a selling restriction on all of the ESS interests you own.

You did not contact Company A to advise them that the selling restriction had applied to your ESS interests in the 2016-17 and 2017-18 income years, but had included the ESS discount amounts in the respective income years in accordance with the information provided on the ESS statements.

Based on the information provided, it is not viewed that the deferred taxing points occurred in relation to the ESS interests in either the 2016-17 or 2017-18 income years. Therefore, you were not required to record the ESS discount amounts as provided in the ESS statements in those income years.