Edited version of private advice

Authorisation Number: 1051786490987

Date of advice: 03 December 2020

Ruling

Subject: Employee share schemes - deferred taxing point - rights to acquire shares

Question 1:

Did the deferred taxing point for your employee share scheme interests (the ESS interests) occur on the date they vested under section 83A-120 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

Yes.

Question 2:

Will you be eligible to apply the capital gains discount to any capital gain made on the disposal of your shares (the Shares) under Division 115 of the ITAA 1997?

Answer:

Yes.

This ruling applies for the following period

1 July 201X to 30 June 202X

Relevant facts and circumstances

In 201X, Company A issued a memorandum to you in relation to their 201X Performance Share Plan (the 201X PSP) which included the following information:

•         You had been awarded X,XXX ESS interests to participate in the 201X PSP , which is a long-term incentive plan designed to align the compensation of a select group of senior employees, with the long-term interests of the company and shareholders, by providing a clear link between individual reward and the creation of shareholder value

•         The award of ESS interests under the 201X PSP is reserved, at the discretion of the Board's Remuneration Committee, for senior management and other influential managers; and

•         The main features of the 201X PSP included that the performance elements of the ESS would be determined using the Total shareholder return (TSR) and Earnings per share (EPS).

You elected to participate in the nil cost option for the 201X PSP.

The vesting date for the ESS interests under the 201X PSP occurred several years after they were granted.

Your X,XXX ESS interests self-exercised on the vesting date and you received X,XXX resulting shares (the Shares). At that time you did not have any inside information, and there were no selling restrictions in relation to the Shares.

Your employment ended several months later.

During the following year you sold the Shares for $XXX,XXX.

An ESS statement for the income year ending 30 June 202X was lodged with the ATO which included information in relation to your various ESS grants, outlining that an ESS discount amount in relation to the 201X PSP ESS interests of $XXX,XXX was included in the total ESS discount for deferral schemes of $XXX,XXX to be reported in your assessment for that income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 83-A

Income Tax Assessment Act 1997 Subdivision 83A-C

Income Tax Assessment Act 1997 Division 115

Reasons for decision

ESS - Deferral schemes

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 and rights to acquire shares, defined as ESS interests, as both remuneration and investments. 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 a share or right to acquire the share in their assessable income

•         Calculating the amount of this discount using the market value of the share or right to acquire the share at this date ignoring any selling restrictions or forfeiture conditions, and

•         Using this date and the market value of the share or right as the acquisition date and amount paid for it for all other income tax purposes.

Subdivision 83A-C of the ITAA 1997 provides that when certain conditions are satisfied, the discount in relation to an ESS interest is not included in the employee's assessable income in the income year they acquire the ESS interest, but will be included when the deferred taxing point (DTP) occurs under section 83A-120 of the ITAA 1997.

The DTP for an ESS interest that is a beneficial interest in a right to acquire a share that was granted on or after 1 July 2015 will be the earliest of the times in accordance with subsections 83A-120(4) to (7) of the ITAA 1997, summarised as follows:

•         When the employee ceases the relevant employment (subsection 83A-120(5) of the ITAA 1997)

•         The end of the 15-year period starting when the employee acquired the ESS interest (subsection 83A-120(6) of the ITAA 1997)

•         When the ESS interest has not been exercised, there is no real risk of forfeiting the ESS interest, and the scheme no longer genuinely restricts disposal of the ESS interest (subsection 83A-120(4) of the ITAA 1997)

•         When the ESS interest is exercised and there is no real risk of forfeiting the share and the scheme no longer genuinely restricts disposal of the share (subsection 83A-120(7) of the ITAA 1997).

Application to your situation

In your situation, you were granted X,XXX ESS interests under a deferral ESS which vested while you were still employed by the company who had granted the ESS interests.

When considering which of the times as outlined in subsections 83A-120(4) to (7) of the ITAA 1997 was the first to occur in your situation, it is viewed that based on the information provided that the first of the listed times to occur was the fourth time under subsection 83A-120(7) of the ITAA 1997.

The conditions for the other times were not met on the date your ESS interests vested as your employment had not ended, the relevant 15-year period had not ended, and you had exercised the ESS interests.

Therefore, based on the information provided the DTP for your ESS interests was on the date they vested as you had exercised them, there was no risk of you forfeiting your ESS interests, and there were no disposal restrictions for the Shares.

Note: Any ESS discount arising in relation to your ESS interests should be reported in the income year in which they vested.

Question 2:

ESS and capital gains tax

In most cases, ESS interests are exempt from capital gains tax (CGT) implications until the discount on the ESS interest has been taxed under the ESS provisions.

Once assessed under the ESS provisions, your ESS interests, or resulting shares, will be assessable under the CGT provisions.

For an ESS interest for which tax is deferred the ESS interest, and the share or right that it forms part of, is taken to have been re-acquired immediately after the DTP. This resets the cost base of the ESS interest to its market value at this time, and resets the acquisition date, which will be relevant to your eligibility for the 50% CGT discount.

Discount capital gains

In accordance with Division 115 of the ITAA 1997 you can generally apply the 50% CGT discount to a capital gain you make if the following conditions are met:

•         You are an individual, complying superannuation entity, a trust, or a life insurance company

•         The capital gain was made after 21 September 1999; and

•         The capital gain was not worked out using a cost base that was calculated using the indexation method or using the cost of a depreciating asset.

The discount percentage for an amount of discount capital gain is 50% for an individual.

Application to your situation

In your situation, the DTP occurred when they vested and your ESS interests self-exercised and you received X,XXX resulting shares, the Shares, on the same date. You are viewed as having sold the ESS interests and acquired the Shares on the vesting date which you then sold more than 12 months later.

Based on the information provided you made a capital gain on the disposal of the Shares in the income year after the vesting date had occurred. As you meet the conditions as outlined above to be eligible to the 50% CGT discount. you can apply the 50% CGT discount to any capital gain you made on the sale of the Shares.