Edited version of private advice

Authorisation Number: 1051748558619

Date of advice: 9 September 2020

Ruling

Subject: Cancellation of options

Question 1

Is the granting of the First Option Agreement and the Second Agreement and the Second Option Agreement caught under the employee share scheme provisions contained in Subdivision 83A of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Will entering into the Cancellation Deed and having the First Option Agreement and the Second Option Agreement cancelled, give rise to CGT event C2 per section 104-25 of the ITAA 1997?

Answer

Yes

Question 3

Will the First Option Agreement have an acquisition date of XX XXXX 2011, and be subsequently cancelled effective at XX XXXX 2018? If so, will the capital gain made on the cancellation of this First Option Agreement qualify for the 12-month 50% CGT discount?

Answer

Yes

Question 4

Will the Second Option Agreement have an acquisition date of XX XXXX 2016, and be subsequently cancelled effective at XX XXXX 2018? If so, will the capital gain made on the cancellation of this Second Option Agreement qualify for the 12-month 50% CGT discount?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Company X is an Australian resident company. The option agreements were between Company Y Ltd as trustee for Trust X, Company Z as trustee for Trust W and Individual X collectively referred to as "the Founder Shareholders".

In the early 20XX's, the Founder Shareholders entered into an option agreement ("First Option Agreement") with you to grant you an option to purchase from the Founder Shareholders 1.5% of all issued shares in Company X (1/3 of 1.5% from each of the Founder Shareholders) at the date of exercise of the option.

This option would lapse either by the earlier of the relevant expiry date or if you ceased to be employed by Company X

In the mid 20XX's, the Founder Shareholders entered into another option agreement ("Second Option Agreement") with you to grant you an option to purchase from the Founder Shareholders 4.5% of all issued shares in Company X (1/3 of 4.5% from each of the Founder Shareholders) at the date of exercise of the option.

This option would lapse if you ceased to be employed by Company X.

You paid no consideration to enter into either of the options.

In the mid 20XX's, the First Option Agreement was amended to vary the expiry date to XX XXXX 20XX. All other terms of the First Option Agreement did not change.

In the mid 20XX's, the terms of the First Option Agreement were again amended to include a partial buyback of a portion of the options.

In 20XX, under an Option Cancellation Deed (Cancellation Deed), the First Option Agreement and the Second Option Agreement were cancelled in exchange for consideration payable by the Founder Shareholders.

Separately, in 20XX, the Founder Shareholders entered into a Share Purchase Agreement ("SPA") with a subsidiary of Company Z.

Assumption

The options granted had a market value greater than $1

Relevant legislative provisions

Income Tax Assessment Act 1997 section 83A-30

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 section 115-10

Reasons for decision

Detailed Reasoning

Employee Share Scheme Provisions

An ESS interest, in a company, is 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.

An employee share scheme is a 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; or

b)    subsidiaries of the company

in relation to the employees' employment.

You have acquired a right to acquire a beneficial interest in a share in a company and therefore this interest would constitute an ESS interest. These interests were provided to you under a scheme in relation to your employment.

Your assessable income for the income year in which you acquire the ESS interest under an employee share scheme includes the discount given in relation to the interest. This is the case if Subdivision 83A-C does not apply to your circumstance, which it doesn't in this instance.

The term 'discount' is not defined for the purposes of Division 83A of the Income Tax Assessment Act 1997 (ITAA 1997). However, the Explanatory Memorandum to the Tax Laws Amendment (2009 Budget Measures No. 2) Act 2009 states at paragraph 1.102 that 'discount' is:

... the market value of the ESS interest less any consideration paid, or to be paid, by the employee.,

The options were issued with a market value greater than $1. There was no consideration paid to enter into these options. They would be issued at a discount which would be assessable.

Therefore the ESS provisions would apply to include an amount in your assessable income that represents the discount.

Since there is an ESS interest, section 83A-30 is relevant. It states that the ESS interest is taken to have been acquired for its market value (rather than its discounted value). This means that the cost base is likely to reflect the market value of the option at the date of grant.

Cancellation of options

Under section 102-20 of the ITAA 1997 you make a capital gain or capital loss as a result of a CGT event.

Section 104-25 of the ITAA 1997 provides CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset being cancelled. The time of the event is:

(a)  when you enter into the contract that results in the asset ending; or

(b)  if there is no contract - when the asset ends.

You make a capital gain if the capital proceeds from the ending are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base.

CGT event C2 occurred when you entered into the option cancellation deed in the 20XX income year.

50% discount

Under section 115-10 of the ITAA 1997, to qualify for the 50% general discount a capital gain must be made by an individual, a complying superannuation entity, a trust or a life insurance company. The capital gain must result from a CGT event happening after 11:45am on 21 September 19XX and must not have an indexed cost base. Also, the gain must result from a CGT event happening to an asset that was acquired at least 12 months before the CGT event.

You have held all options for more than 12 months; you are an individual and the CGT event occurred after 11:45am on 21 September 19XX. Therefore, you are entitled to discount a capital gain that results from the cancellation of your options by 50%.