Edited version of private advice

Authorisation Number: 1051685483488

Date of advice: 28 May 2020

Ruling

Subject: Employee share scheme

Question

Does Sub-Co have a reporting obligation under Division 392 of the Taxation Administration Act 1953 (TAA 1953) if rights to shares in Parent-Co (Rights) were provided to the Australian-resident employees of Sub-Co under an Agreement with the employee (the Agreement) in accordance with the Employee Incentive Plan (the Plan)?

Answer

Yes. A reporting obligation arises for a financial year in which Australian-resident employees of Sub-Co are granted the Rights under the Agreement in accordance with the Plan.

A further reporting obligation arises for the financial year in which the Rights vest, being a deferred taxing point for the Rights, unless the share acquired is disposed of within 30 days of the vesting time in which case the disposal date becomes the deferred taxing point for which a reporting obligation arises.

Where the Rights are forfeited (upon cessation of employment or otherwise), a further reporting obligation may arise under section 392-10 of the TAA 1953 if the original grant of the Rights had been previously reported.

This ruling applies for the following periods:

Income year ended 30 June 20XX to 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

1.         Sub-Co is an Australian company registered with the Australian Securities and Investment Commission.

2.         Sub-Co is a subsidiary of Parent-co, a foreign company with shares listed on a foreign stock exchange.

3.         The predominant business of Sub-co and Parent-Co is not the acquisition, sale or holding of shares, securities or other investments.

4.         Parent-Co has in place an Employee Incentive Plan (the Plan) that grants equity ownership opportunities and performance-based incentives to the Company's employees, officers and directors.

5.         The term 'Company' includes Parent-Co as well as any of Parent-Co's present or future parent or subsidiary company. As such, the term 'Company' includes Sub-Co.

6.         The awards that can be granted under the Plan include rights to ordinary shares in Parent-Co (Rights) to be delivered at the time the Rights vest.

7.         The Rights are granted to individual employees pursuant to an Agreement with the employee (the Agreement) tailored for that individual employee:

a.    The Agreement is between Parent-Co (i.e. the Company) and the employee.

b.    It is provided that 'employment with the Company shall include employment with a parent or subsidiary of the Company'.

c.     The Agreement grants the number of Rights subject to vesting.

d.    There are particular vesting conditions with all Rights vesting at the latest after 3 years from the date of the granting of the Rights.

e.    If the employee ceases to be employed by the Company for any or no reason, with or without cause, before the Rights vest, all of the Rights that are unvested at the time of such employment termination shall be immediately forfeited to the Company.

f.      If the employee's employment is terminated due to his or her death or total disability, the employee's unvested Rights become 100% vested as of his or her last day of employment.

g.    The Rights are restricted from transfer.

8.         Employees do not pay any consideration for the grant of the Rights. Nor do they pay any consideration upon the vesting of the Rights and distribution of shares represented by the vested Rights.

9.         After acquiring the Rights, the employee:

a.    Will not hold a beneficial interest in more than 10% of the shares in Parent-Co; and

b.    Will not be 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 Parent-Co.

Relevant legislative provisions

Division 392 of the Taxation Administration Act 1953

Section 83A-10 of the Income Tax Assessment Act 1997

Subdivision 83A-B of the Income Tax Assessment Act 1997

Subdivision 83A-C of the Income Tax Assessment Act 1997

Subdivision 83A-E of the Income Tax Assessment Act 1997

Reasons for decision

Division 392 of the Taxation Administration Act 1953 (TAA 1953)

10.      Subsection 392-5(1) of the TAA 1953 provides that an entity (the employer) must give a statement to the Commissioner and to an individual for a financial year if:

(a)  Both of the following subparagraphs apply:

(i)            The employer provides ESS interests to the individual during the year;

(ii)           Subdivision 83A-B or 83A-C of the Income Tax Assessment Act 1997 (ITAA 1997) applies to the interest;

OR

(b)  All of the following subparagraphs apply:

(i)            The employer has provided ESS interests to the individual (whether during the year or during an earlier year);

(ii)           Subdivision 83A-C of the ITAA 1997 applies to the interests;

(iii)          The ESS deferred taxing point for the interests occurs during the year.

11.      Under subsection 392-5(5) of the TAA 1953, the statement must be given:

(a)  To the individual no later than 14 July after the end of the year; and

(b)  To the Commissioner no later than 14 August after the end of the year.

12.      If the provider becomes aware of a material change or material omission in any information given to the individual or the Commissioner, the provider must pursuant to subsection 392-10(1) notify the individual and the Commissioner of the change or omission within 30 days after becoming aware of the change or omission.

13.      Therefore, for there to be a reporting obligation under Division 392 of the TAA 1953, there must first be the grant of an ESS interest to an individual.

ESS Interest

14.      An ESS interest in a company is defined in subsection 83A-10(1) of the ITAA 1997 as either a beneficial interest in a share in the company, or a beneficial interest in a right to acquire a beneficial interest in a share in the company.

15.      The Rights that are granted to the Australian-resident employees of Sub-Co pursuant to the Plan and the Agreement are rights to acquire a beneficial interest in a share of Parent-Co.

16.      The Rights are therefore ESS interests as defined by section 83A-10(1) and for the purposes of Division 392 of the TAA 1953.

Subdivision 83A-B of the ITAA 1997

17.      Section 83A-20 of the ITAA 1997 provides that subdivision 83A-B of the ITAA 1997 applies to an EES interest if an employee acquires the interest under an employee share scheme at a discount.

18.      An 'employee share scheme' (ESS) is defined in subsection 83A-10(2) of the ITAA 1997 as a scheme under which ESS interests in a company are provided to employees, or associates of employees (including past or prospective employees) in relation to the employee's employment.

19.      The scheme established by the Plan is an ESS because it provides to the employees of the Sub-Co rights to shares in Parent-Co in relation to the employee's employment with Sub-Co.

20.      The term 'discount' is not defined in the ITAA 1997. However, paragraph 1.102 of the Explanatory Memorandum to the Tax Laws Amendment (2009 Budget Measures No. 2) Bill 2009 states that:

The discount is the market value of the ESS interests less any consideration paid or to be paid by the employee.

21.      The Australian-resident employees of Sub-Co do not pay any consideration for the grant of the Rights.

22.      Therefore, the Rights are ESS interests acquired by the employee under an employee share scheme at a discount and, as such, subdivision 83A-B of the ITAA 1997 applies.

Subdivision 83A-C of the ITAA 1997

23.      Subsection 83A-105(1) of the ITAA 1997 provides that subdivision 83A-C of the ITAA 1997 applies, and subdivision 83A-B does not apply, to an ESS interest that is a beneficial interest in a right to acquire a beneficial interest in a share if all of the following conditions are satisfied:

(a)  Subdivision 83A-B would apart from this section apply to the interest (as stated above, subdivision 83A-B would apply);

(b)  After applying section 83A-315, there will still be a discount;

(c)   Section 83A-33 (about starts ups) does not apply;

(d)  Subsections 83A-45(1), 83A-45(2), 83A-45(3) and 83A-45(6) apply;

(e)  Subsection 83A-105(12) applies; and

(f)    Subsections 83A-105(3) or 83A-105(4) applies.

24.      Section 83A-315 of the ITAA 1997 provides that if the Income Tax Assessment Regulations 1997 (ITAR) specify an amount in relation to an ESS interest, that amount can be used as the market value of the ESS interest. Regulation 83A-315.03 of the ITAR provides that if the lowest amount that must be paid to exercise the right to acquire a beneficial interest in a share is nil or can not be determined, the value of the right on a particular day is the same as the market value of the share on that day.

25.      As the Australian-resident employees of Sub-Co do not pay any consideration for the grant of the Rights, nor do they pay any consideration upon the vesting of the Rights and distribution of shares represented by the vested Rights, there will still be a discount even after applying section 83A-315 of the ITAA 1997.

26.      Section 83A-33 applies if no equity interests in the company in which the ESS interest is in are listed on an approved stock or securities exchange. As the shares of Parent-Co are listed on a foreign stock exchange, section 83A-33 does not apply.

27.      Section 83A-45(1) requires that the individual acquiring the ESS interest must be employed by the company offering the ESS interest or one of its subsidiaries. On the present facts, the company offering the ESS interest is Parent-Co and the Australian-resident employee is employed by Sub-Co which is a subsidiary of Parent-Co. Therefore, section 83A-45(1) is satisfied.

28.      Section 83A-45(2) requires that the ESS interests acquired under an ESS must only relate to ordinary shares. On the present facts, the Rights entitle the recipient to only receive ordinary shares in Parent-Co. Therefore, section 83A-45(2) is satisfied.

29.      Section 83A- 45(3) requires that the employee is not employed by a company, or its holding or subsidiary company, where the predominant business is the acquisition, sale or holding of shares, securities or other investments. On the present facts, the predominant business of Parent-Co and Sub-Co is not the acquisition, sale or holding of shares, securities or other investments. Therefore, section 83A-45(3) is satisfied.

30.      Section 83A-45(6) requires that, after acquiring the ESS interest, the employee must not hold a beneficial interest in more than 10% of the shares in the company, nor be 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. On the present facts, section 83A-45(6) is satisfied.

31.      Section 83A-105(2) of the ITAA 1997 requires that at least 75% of permanent employees (who are Australian residents with at least 3 years of service) of the employer are eligible to participate in the ESS on a non-discriminatory basis. The Plan is available to all of the Company's employees, officers, and directors. Therefore, section 83A-105 (2) is satisfied.

32.      Section 83A-105(3) of the ITAA 1997 requires that there be a real risk under the conditions of the scheme that the employee will forfeit the ESS interest, or lose it other than by disposing of it. The Agreement provides that if the employee ceases to be employed by the Company, all of the Rights that are unvested at the time of such employment termination shall be immediately forfeited. Therefore, there is a real risk of forfeiture for the purposes of section 83A-105(3) of the ITAA 1997.

33.      The exception for death and total disability in the Agreement does not prevent the Rights from being at a real risk of forfeiture because it only operates when special circumstances occur that are outside the control of the employee. It does not prevent the risk of forfeiture for the employee if they cease employment in normal circumstances, from being real. It is consistent with the genuine purpose of the scheme to align the interest of the employee and employer and only provide relief for employees in unfortunate circumstances (see ATOID 2010/61 - Income Tax: Employee Share Scheme: real risk of forfeiture - minimum term of employment and good leaver provisions).

34.      As section 83A-105(3) of the ITAA 1997 applies, there is no need for section 83A-105(4) of the ITAA 1997 to apply.

35.      As all the conditions in subsection 83A-105(1) of the ITAA 1997 are satisfied, subdivision 83A-C applies to the Rights.

ESS Deferred Taxing Point

36.      Section 83A-120 provides that, subject to the 30-day rule, the deferred taxing point is the earliest of:

(a)  When there is no real risk of forfeiture of the rights to acquire shares and any restrictions on the sale of the rights are lifted;

(b)  When the employee ceases the employment for which they acquire the rights (this ESS deferred taxing point will not arise on the facts of the present case because unvested Rights will be forfeited upon cessation of employment); or

(c)   15 years after the employee acquired the rights (this ESS deferred taxing point will not arise on the facts of the present case because the Rights will vest at the latest after 3 years from the date of the granting of the Rights).

37.      The 30-day rule provides that where the employee disposes of the interest within 30 days of the original deferred taxing point, the date of disposal is taken to be the deferred taxing point (see section 83A-115(3)).

38.      Therefore, the ESS deferred taxing point for the Rights is the dates on which they vest,[1] or in the event that the shares acquired at vesting were disposed of within 30 days, the disposal date then becomes the deferred taxing point.

39.      In the event that the Rights are forfeited upon cessation of employment (or otherwise), section 83A-310 of the ITAA 1997 will apply to deem Division 83A as never applying. If an earlier statement had been provided upon the granting of the Rights, this forfeiture may result in a material change to the information provided in the earlier statement given to the individual and/or the Commissioner. In this circumstance, a reporting obligation will arise under section 392-10 of the TAA 1953 in respect of this material change.

Conclusion

40.      Sub-Co will have a reporting obligation under Division 392 of the TAA 1953 if:

(a)  During an income year, an Australian-resident employee of Sub-Co receives Rights under the Agreement in accordance with the Plan and subdivision 83A-B or 83A-C applies to tax that ESS interest;

(b)  During an income year or a previous income year, an Australian-resident employee of Sub-Co receives Rights under the Agreement in accordance with the Plan where tax was deferred under subdivision 83A-C, and one of the ESS deferred taxing points in section 83A-120 of the ITAA 1997 occurred during the income year. On the facts of the present case, this will occur upon the vesting of the Rights unless the shares acquired are disposed of within 30 days of the vesting time in which case a reporting obligation will arise on the disposal date; or

(c)   During an income year, Rights (the original grant of which were reported in a previous income year) were forfeited (upon cessation of employment or otherwise), resulting in a material change requiring reporting under section 392-10 of the TAA 1953.