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Edited version of private advice
Authorisation Number: 1051685020654
Date of advice: 25 May 2020
Ruling
Subject: Employee share scheme
Question 1
Are the options granted to an individual made under an employee share scheme as defined in section 83A-10(2) of the Income Tax Assessment 1997 (ITAA 1997)?
Answer
No
This ruling applies for the following period:
Year end 30 June 20XX
The scheme commences on:
XX/XX/20XX
Relevant facts and circumstances
1. The individual, a co-founder and chief executive officer of Company A established in 20XX.
2. Since 20XX Company A has had an employee option plan for its employees however the individual is not a participant in this employee option plan.
3. In 20XX Company A entered into an agreement to acquire Company B for $XXX, funded through scrip for scrip and a round of equity injection.
4. During negotiations there was a differing of opinion with regards to the independent market value of Company A of $XXX, with a lower value of $XXX asserted by Company B resulting in the dilution of the individual's (ownership) interest in Company A.
5. To rectify this dilution, it was agreed by the shareholders of Company A and Company B, to issue options to purchase stock to the individual with the individual to sell down a small portion of their controlled common stock.
6. It was agreed to issue XXX number of options to the individual as described in terms of the agreements provided.
7. The number of options granted to the individual is the difference between:
· the percentage of the individual's shareholdings in Company A after it acquired Company B as if Company A had a market value of $XXX, and
· the percentage of the individual's shareholdings in Company A after it acquired Company B as if Company A had a market value of $XXX.
8. It is proposed that each option will have a strike price of $X but the individual can unilaterally change the strike price before the options are granted with the options exercisable immediately after grant.
9. Other than the conditions that bind all shareholders of Company A no further conditions will be imposed on the individual in relation to the exercise of these options or the common stock acquired after the exercise of those options.
10. The options will be granted to the individual without any conditions relating to the individual's employment with Company A, such as a minimum employment period or achieving any key performance indicators.
Relevant legislative provisions
Income Tax Assessment Act 1997, Division 83A.
Income Tax Assessment Act 1997, Subsection 83A-10(1).
Income Tax Assessment Act 1997, Subsection 83A-10(2).
Reasons for decision
Question 1
Are the options granted to the individual made under an employee share scheme, as defined in section 83A-10(2)?
Summary
The options granted to the individual under the terms of the Agreement are granted to the individual in their capacity as a shareholder and not as an employee and therefore do not satisfy the requirements of section 83A-10(2).
Detailed reasoning
1. Division 83A applies to shares, rights and stapled securities acquired under an employee share scheme on or after 1 July 2009.
2. An employee share scheme is defined in subsection 83A-10(2) as:
*scheme under which *ESS interests in a company are provided to employees, or *associates of employees, (including past or prospective employees) of:
a) the company,
b) subsidiaries of the company;
in relation to the employee's employment.
3. An ESS interest in a company is defined in subsection 83A-10(1) as a beneficial interest in:
a) a *share in the company; or
b) a right to acquire a beneficial interest in a share in the company.
4. For the options to be considered as falling within subsection 83A-10(2) and granted under an employee share scheme there needs to be a nexus between the options being granted and the individual's employment.
5. The options being granted to the individual are the result of Company A entering into an agreement to acquire Company B.
6. As described in the terms of the Agreement, the 'Future Option Grants' are intended to help mitigate the dilution incurred by the individual as a result of the transaction contemplated.
7. The options granted to the individual are granted in their capacity as a shareholder of Company A and are not related nor contingent to their employment with Company A as detailed in the terms of the agreement. Further:
· the individual has never received any options to acquire common stock in Company A pursuant to Company A's employee share option plan
· the number of options granted have been determined by comparing the dilution of the individual's percentage of ownership in Company A under the two differing market valuations
· all the shareholders have agreed to grant the options to the individual for a nominal exercise price of $X
· the options are immediately vested and exercisable, and
· there is no obligation for the individual to remain employed with Company A for any period or fulfil any key performance indicators pursuant to their employment to retain or exercise the options.
8. Therefore, as the options granted to the individual are in relation to them as shareholder and not as an employee of Company A, the conditions in subsection 83A-10(2) will not be met.