Edited version of private advice

Authorisation Number: 1051881368559

Date of advice: 6 August 2021

Ruling

Subject: Employee share scheme

Question 1

Will Division 83A of the Income Tax Assessment Act 1997 (ITAA 1997) apply to the acquisition of units by The Employee from the trustee of the Trust when they do not pay anything to acquire the Units?

Answer

Yes

Question 2

Will subdivision 83A-C of the Income Tax Assessment Act (ITAA 1997) apply in relation to the acquisition of units by The Employee where he does not pay anything to acquire the Units?

Answer

Yes

Question 3

When The Employee acquires Units under the Plan and does not pay anything to acquire those Units, and assuming the ESS deferred taxing point is not the 15th anniversary of the date of acquisition under subsection 83A-115(6) of the ITAA 1997 nor in accordance with the 30-day rule in subsection 83A-115(3) of the ITAA 1997 and that an Exit Event has not occurred, will the ESS deferred taxing point under subsections 83A-115(4) and (5) of the ITAA 1997 be the same time?

Answer

Yes

Question 4

What amount will be included in the assessable income of The Employee at the ESS deferred taxing point for the Units?

Answer

The amount that will be included in the assessable income of The Employee at the ESS deferred taxing point for each Unit will be the market value of the Share referrable to that Unit reduced by the cost base (if any) of the Unit.

Question 5

Will The Employee Redemption Amount constitute assessable income of The Employee, even if he participates indirectly through an associate?

Answer

Yes

Question 6

In the event of a disqualifying event occurring in relation to Units held by The Employee will section 83A-310 of the ITAA 1997 operate to treat Division 83A to be taken to never have applied to the ESS interests represented by such units?

Answer

Yes

Question 7

Will contributions made by The Employee to acquire additional units in the Trust constitute assessable income of The Employee?

Answer

No

Question 8

Will The Employee be liable for capital gains tax on any capital gain made upon the redemption of ordinary employee units?

Answer

No, unless the redemption of ordinary units occurs after the deferred taxing point for the ESS interest.

Question 9

Where The Employee has paid market value for the acquisition of additional units will he be liable for capital gains tax on any capital gain made upon the redemption of units?

Answer

Yes

Question 10

Will the general anti-avoidance provisions under Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) apply to the scheme described?

Answer

No

This ruling applies for the following periods:

Year Ended 30 June 20XX

Year Ended 30 June 20XX

Year Ended 30 June 20XX

Year Ended 30 June 20XX

Year Ended 30 June 20XX

The scheme commences on:

The scheme commences in the income year ending 30 June 20XX

Relevant facts and circumstances

This scheme description incorporates, and should be read with, the draft Trust Deed (Trust Deed) and Employee Manual.

The Company group is an Australian based company group.

The Company group (Company Group) consists of the Company (the Employer), who acts as the head company, and XX wholly owned subsidiary companies.

The Company Group has decided to introduce an Employee Share Plan (the Plan) as a mechanism for rewarding, retaining and motivating its employees.

The Company Group has the following reasons for introducing the Plan:

•         Provide a mechanism for rewarding staff for their loyalty and effort in a structured, equitable and transparent manner;

•         Provide benefits for existing employees and attract new employees;

•         Assist to engender responsibility for the performance of our business throughout our employees and provide a mechanism that rewards staff for our collective and individual contributions.

The Company Group will operate the Plan through a Trust (the Trust).

The Employee, an employee of the Employer, expects to receive an invitation to be a Participant in the Plan.

Description of the Plan and terms of the Trust Deed

The Trust is used to acquire fully paid ordinary shares in the capital of the Employer (Shares) for employees of the Company Group pursuant to the Plan. The Trust provides an arm's-length vehicle through which Shares can be acquired and held on behalf of employees providing the liquidity of employee held Shares in a simple flexible manner compared to the Employer buying back Shares from employees. In effect, this aspect allows the Employer to satisfy corporate law requirements relating to companies dealing in their own shares. The Trust provides the following benefits to the Employer:

•         Allows key shareholders to keep control over company ownership.

•         Registration of shares in the Trustee's name provides control over identity of shareholders, preventing a sale to unrelated persons.

•         If the Employer is sold, it is easier to "mop-up" employee shareholders.

•         Enables the Disqualification Event and Redemption and Disqualification Discount provisions (as defined) to be enforced in a simple manner through the Trust.

From the commencement of the Plan, annual contributions are made to the Trust by the Employer in accordance with a formula established by the Employer for the subscription or acquisition of Shares for the purposes of the Plan.

The Trustee, at the direction of the Employer, uses any money contributed by the Employer and any residual amounts to purchase Shares from the existing shareholders of the Employer, although a small amount is retained to provide for the administration of the Plan. The Trust Deed allows for the Employer to direct the Trustee to subscribe for Shares, but it is not the Employer's current intention for the Trustee to use this method to acquire Shares. The Trust Deed does not allow, and under no circumstances may, the Trustee repay to the Employer or any Associated Company any amount received as contributions for the subscription or acquisition of Shares.

The Employer and its Associated Companies have no proprietary right or interest, charge or lien in the Company shares acquired by the Trustee under the Trust Deed. No member of the Group (the Company and its Associated Entities) has, or is able to acquire, a beneficial interest in the assets of the Trust. The Employer and its Associated Companies do not have any right to the income or capital of the Trust.

The Trustee will only invest in shares in the Employer. The Trustee is not permitted to make any loans or provide any other form of financial assistance.

Additional funds that are derived through unallocated Shares need to be applied for the purpose of the Trust i.e. to acquire shares and allocate them to Participants or to pay administration costs of the Trust.

If the Trust terminates, any residual income or capital amounts must be applied to an employee of the Company, a Participant, a complying superannuation fund or a charity nominated by the Employer. On termination of the Trust, no amount can be paid to the benefit of the Employer or any associate.

The Trustee will not borrow any money for a purpose other than meeting the administration costs of the Trust. There will be no security provided on such loans and interest will not be more than arm's length commercial rates.

The equity made available for purchase by the Trustee under the terms of the Trust Deed is XX% of the issued Shares. This will be reviewed every two years.

Shares will be held by the Trustee as Unallocated Shares until such Shares are allocated to Eligible Employees who become Participants in the Plan.

The Employer will be entitled under the Trust Deed to nominate and invite Eligible Employees to participate in the Plan.

Eligibility to participate in the Plan is based upon an independently assessed set of criteria. To be eligible to benefit from any contributions subsequent to the initial contribution (and any residual amounts of capital after the application of Disqualifying Events or Disqualifying Discounts) an employee must have been continuously employed as a permanent employee of the Employer for three years excluding any breaks in employment (e.g. leave without pay). Subject to a demonstrated commitment to Company (determined by the exercise of the Directors discretion) and meeting the expectations of their current role (demonstrated by having no significant performance issues), the Employer will invite Eligible Employees to participate in the Plan by owning Units.

Clause X of the Trust Deed states, that notwithstanding anything else express or implied in the Trust Deed, the Plan must be available to at least seventy-five (75) percent of the permanent employees of the Employer who have completed as least 3 years of service (whether continuous or noncontinuous) with the employer.

The beneficial interest of the Shares in the Trust Fund is divided into Units. The Trust Deed is expressly made with the intention that the Units in the Trust Fund confer to the Participants a beneficial interest in the Shares in the Employer.

The invitation will include the terms and conditions upon which the Units will be issued. Following receipt of an invitation, an Eligible Employee who wishes to participate in the Plan will return the completed application form. Upon acceptance of the application by the Employer, Eligible Employees become Participants in the Plan. The Employer will then instruct the Trustee to allocate a specific number of Units to the Eligible Employee and to designate one Share to each Unit (Allocated Share). The Trustee shall ensure such designation is recorded in the books and records of the Trust.

Eligible Employees may make a contribution toward the acquisition of a Unit. An Eligible Employee may participate in a salary sacrifice arrangement in relation to the acquisition of Units in accordance with the Plan.

The Units provided to the Participants are substantially the same rights in respect of the Shares which are allocated to the Units as if the Participants were the legal owners of the Shares. Subject to the provisions of the Trust Deed, a Unitentitles the Participants to:

•         receive the income deriving from the Allocated Shares including dividends declared by the Directors at their discretion in respect of the Shares

•         to the extent that voting rights are attached to the Shares, direct the Trustee on how it should be exercised in any manner permitted by the Trustee, and

•         receive The Employee Redemption Amount on redemption.

The Units may be issued to an associate of an Eligible Employee (and the associate will be a Participant under the Plan).

The number of Units issued to a Participant will be determined by the Trustee with reference to the following factors:

•         role/responsibility- reflected by consideration of current role, with key metric including current base salary level (FTE), and

•         performance/KPIs an individual performance KPIs will be agreed and reviewed annually.

The Trustee shall keep and maintain an up-to-date register of all Unit Holders.

Units cannot be transferred or assigned or otherwise dealt with in favour of any person nor can any equitable, contingent, future or partial interest or other security interest be created in a Unit.

Where the Shares are allocated to a particular Participant, any dividends that the Trustee receives as the result of holding those Shares in the Trust will flow-through to the relevant Participant. Where Shares remain unallocated in the Trust any dividends that the Trustee receives as the result of holding those Shares in the Trust will be retained as part of the capital of the Trust.

The Trust Deed provides that if a Disqualifying Event occurs, the relevant Participant will forfeit any right or interest in the Units acquired for the benefit of the Participant under the Plan. "Disqualifying Event" is defined in the Trust Deed.

Redemption clause

The redemption clause provide that, subject to the Trust Deed, a Participant is only entitled to have their Units redeemed on the first to occur of the following events (or otherwise direct the Trustee to transfer the relevant Allocated Shares in accordance with the Trust Deed):

a)    the Participant or, if the Participant is an Associate, the relevant Eligible Employee, ceases to be employed by or otherwise providing services to the Company or any Associated Company (this only arises if the cessation of employment or provision of services does not give rise to the forfeiture of Units under the Trust Deed);

b)    the 15th anniversary of the acquisition of those Units by the Participant; and

c)    an Exit Event other than a Share Sale (noting that in the event of a Share Sale, the relevant Participant or Eligible Employee is entitled to the cash value of the Allocated Shares referable to their Units sold, net of any costs in relation to the selling of those Allocated Shares)

An Exit Event means:

a)    a Listing - an initial public offering of an IPO Entity (as defined) to the official list of ASX Limited or another recognised stock exchange;

b)    a Business Sale - a sale to a third party purchaser of all (or substantially all) of the assets and business undertaking of the Group (including by way of a sale of shares of the Company's directly or indirectly owned Subsidiaries) provided that no sale or transfer undertaken to effect a corporate reorganisation of the Group will constitute a Business Sale; or

c)    a Share Sale - the sale by Shareholders (in one transaction or a series of connected transactions) to a third-party purchaser of all of the issued Shares provided that no sale or transfer undertaken to effect a corporate reorganisation of the Group will constitute a Share Sale.

Upon redemption of such Unit the relevant Disqualification Discounts (if any) will apply to the Units redeemed, rounded up to the nearest whole number. 'Remaining Units' means the Units held by a Participant after the application of the Disqualification Discounts (if any). The Participant will be entitled to the rights and interests in the Remaining Units, and will forfeit any rights or interests in the Units that the Participant would, but for the application of the disqualification Discounts, have been entitled to.

However, no Disqualifying Discounts are applicable to any Units: whose issue was funded by the Participant wholly by way of Employee's Contribution; or in the event that there is an Exit Event other than a Share Sale (that is there is accelerated vesting where the relevant redemption trigger is an Exit Event other that a Share Sale).

Further, where an Exit Event that is a Share Sale occurs, then the Participant is entitled to the cash value of the Allocated Shares referable to their Units sold ignoring any Disqualification Discount that would otherwise arise in the event of a redemption at that time and net of any costs in relation to the sale of those Allocated Shares (that is, there is also accelerated vesting where the relevant redemption trigger is a an Exit Event by way of Share Sale).

The holder of the Remaining Units in the event of cessation of employment or provision of services or in the event that the redemption trigger is the 15^th anniversary of the issue date of the relevant Units shall be entitled to direct the Trustee to either:

(a)  sell the Allocated Shares referable to the Remaining Units or Units held by the Trustee on behalf of the Participant and receive from the Trustee The Employee Redemption Amount (the cash value of the Allocated shares referable to the Remaining Units sold, net of any costs in relation to the selling of those Allocated Shares); or

(b)  transfer the Allocated Shares referable to the Remaining Units or Units held by the Trustee to the Eligible Employee or the Participant.

(c)   Continue to hold their Remaining Units.

The Plan is operated in accordance with the above clause so that a participant may request delivery of the Shares or request that the Shares are sold on their behalf.

However, the Shares or Employee Redemption Amount will not be transferred/paid until a 12 month period (bad leaver period) has passed and the employee is not found to be a bad leaver (e.g. an employee who within 12 months of cessation of their employment with the Employer commences employment with a competitor of the Employer).

Disqualification Discounts are defined in the Trust Deed

Entitlement Percentage are defined in the Trust Deed.

Assumptions

Immediately after The Employee acquires Units they will not hold a beneficial interest in more than 10% of the Shares in the Employer and will not be in a position to cast or control the casting of more than 10% of the maximum number of votes that might be cast at a general meeting of the company (taking into account and including any Shares and any voting rights that he would have by exercising any rights he has over Shares and the holdings of his associates).

An Exit Event is not anticipated at the time of acquisition of the Units by Participants.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 Section 83A-10

Income Tax Assessment Act 1997 Section 83A-20

Income Tax Assessment Act 1997 Section 83A-45

Income Tax Assessment Act 1997 Section 83A-105

Income Tax Assessment Act 1997 Section 83A-110

Income Tax Assessment Act 1997 Section 83A-115

Income Tax Assessment Act 1997 Section 83A-125

Income Tax Assessment Act 1997 Section 83A-310

Income Tax Assessment Act 1997 Subdivision 130-D

Income Tax Assessment Act 1997 Subsection 130-80

Income Tax Assessment Act 1997 Subsection 130-85

Income Tax Assessment Act 1936 Part IVA

Reasons for Decision

Question 1

Summary

Division 83A of the Income Tax Assessment Act 1997 (ITAA 1997) will apply to the acquisition of units by The Employee from the trustee of the Trust when he does not pay anything to acquire the Units.

Detailed reasoning

Division 83A applies to an ESS interest if you acquire the interest under an employee share scheme at a discount.

Section 83A-1 states that your assessable income includes discounts on shares, rights and stapled securities you (or your associate) acquire under an employee share scheme.

Subsection 83A-10(1) states that an ESS interest, in a company, is a beneficial interest in: a share in the company; or a right to acquire a beneficial interest in a share in the company.

Subsection 83A-10(2) states that 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 the company; or subsidiaries of the company; in relation to the employees' employment.

The combined effect of section 83A-20 and paragraph 83A-105(1)(a) is that Division 83A (and, in particular, either Subdivision 83A-B or 83A-C) will apply to an ESS interest if you acquire the interest under an employee share scheme and at a discount.

Unless Subdivision 83A-C applies to the shares, Subdivision 83A-B will apply and the shares will be subject to tax on acquisition.

Application to your circumstances

When The Employee accepts an invitation to acquire Units in the Trust for no consideration he will acquires ESS interests. It is accepted that the Units will give The Employee a beneficial interest in the underlying Share that is referrable to the Unit under the terms of the Trust Deed for the purposes of section 83A-10(1).

As the value of the Units are considered to be equal to the value of the underlying Shares and The Employee will not pay consideration for the Units, The Employee will have acquired the ESS interests at a discount.

The Units in the Trust are provided to The Employee as an incentive from his Employer and as such are clearly acquired by The Employee in relation to his employment.

Therefore, Division 83A will apply to the acquisition of Units by The Employee when he does not pay anything to acquire the Units.

However, it should be noted that where The Employee acquires Units in the Trust and pays market value consideration for such Units neither of the operative Subdivisions of Division 83A will apply to the acquisition of such Units. Although the interests acquired meet the definition of ESS interests in section 83A-10 and such interests are arguably acquired in relation to employment, Division 83A will only apply where such interests are acquired at a discount. Therefore, in those circumstances Division 83A will not apply to any Units acquired by The Employee at market value.

Question 2

Summary

Subdivision 83A-C of the ITAA 1997 will apply to the ESS interests acquired by The Employee under the Plan where he does not pay anything to acquire the Units.

Detailed Reasoning

Where Subdivision 83A-C applies (the conditions specified in that subdivision are met) the income year in which the shares are subject to tax is deferred. Under subsection 83A-110(1), a taxpayer's assessable income for the year in which the ESS deferred taxing point occurs includes the market value of the ESS interest at the ESS deferred taxing point reduced by the cost base of the interest.

Section 83A-105 relevantly provides that Subdivision 83A-C applies, and Subdivision 83A-B does not apply, to an ESS interest that is a beneficial interest in a share if all of the following conditions are satisfied:

•         Subdivision 83A-B would apart from this section apply to the interest (as discussed above regarding Units acquired at a discount).

•         Paragraphs (aa) and (ab) of subsection 83A-105(1) are satisfied.

•         When the taxpayer acquires the interest they are employed by the company or a subsidiary of the company (subsection 83A-45(1)).

•         When the taxpayer acquires the interest all the interests available for acquisition under the employee share scheme relate to ordinary shares (subsection 83A-45(2)).

•         When the taxpayer acquires the interest the predominant business of the company is not the acquisition, sale or holding of shares, securities or other investments (subsection 83A-45(3).

•         Immediately after the taxpayer acquires the interest they do not hold a beneficial interest in more than 10% of the shares in the company and are not in a position to cast or control the casting of more than 10% of the maximum number of votes that might be cast at a general meeting of the company (Subsection 83A-45(6)), taking into account and including any shares and any voting rights that they would have by exercising any rights they have over shares (subsection 83A-45(7)) and the holdings of their associates (83A-305(2)).

•         At the time the taxpayer acquired the interest at least 75% of the permanent employees of their employer who have completed at least 3 years of service (whether continuous or non-continuous) with the employer and who are Australian residents are, or at some earlier time had been, entitled to acquire:

­   ESS interests under the scheme; or

­   ESS interests in the employer; or a holding company of the employer; under another employee share scheme (subsection 83A-105(2)).

•         When the employee acquires the interest there is a real risk that under the conditions of the scheme they will forfeit or lose the interest other than by disposing of it (subsection 83A-105(3)).

Real Risk of Forfeiture

The Explanatory Memorandum to the Tax Laws Amendment (2009 Budget Measures No.2) Bill 2009 (EM) which inserted Division 83A, explains the real risk of forfeiture test at paragraph 1.156 as follows:

'The 'real risk of forfeiture test' does not require employers to provide schemes in which their employee share scheme benefits are at a significant or substantial risk of being lost. However, real is regarded as something more than a mere possibility. Something is not a real risk if a reasonable person would disregard the risk as highly unlikely to occur or as nothing more than a rare eventuality or possibility. '

It is further explained at paragraph 1.158 of the Explanatory Memorandum that the 'real risk of forfeiture' test is intended to provide for deferral of tax when there is a real alignment of interests between the employee and employer, through the employee's benefits being at risk.

Real risk of forfeiture in a scheme may include conditions where retention of the ESS interests is subject to performance hurdles or a minimum term of employment.

ATO Interpretative Decision ATO ID 2010/61 Income tax: Employee share scheme: real risk of forfeiture-minimum term of employment and good leaver provisions provides the Commissioner's view of when ESS interests that are rights will be considered to be at a real risk of forfeiture. The Commissioner's view espoused in the ATO ID would apply equally where the test is applied to shares. When an employee acquires rights under an employee share scheme, the Commissioner considers that there is a real risk of forfeiture if, under the conditions of the scheme, the employee will forfeit or lose the rights if they cease employment before the vesting date of the rights where that date is 12 months or more from the date the rights were granted. It states:

'In considering whether a condition in a scheme imposes a real risk of forfeiture, regard should be had to whether a reasonable person would consider that there is a genuine connection between the forfeiture condition and aligning the interests of the employee and employer. If the risk of forfeiture is over a very short period of time to gain access to a relatively long period of deferral the risk will not be considered real.'

Where a scheme contains good leaver conditions that allow ESS interests to be retained for example, in the event of death, invalidity or bona fide redundancy, the Commissioner accepts that the ESS interests are at a real risk of forfeiture.

The Commissioner will also accept there is a real risk of forfeiture despite an early vesting condition if the circumstances when early vesting may occur is limited to circumstances beyond the taxpayers control e.g. on a takeover, sale or liquidation of the employer company, there is no contrivance and employees do not routinely receive their shares (see example 1.10 in the EM).

There is no real risk of forfeiture where a scheme simply includes a condition which:

•         restricts an employee from disposing of an ESS interest for a specified time

•         allows an employee to request that the ESS interest be forfeited

•         provides for an employee to forfeit an ESS interest if they are dismissed for fraud or gross misconduct.

Application to your circumstances

Paragraphs (aa) and (ab) of subsection 83A-105(1) are satisfied in relation to the ESS interests.

The Employee is a current employee of the Employer and so the condition in subsection 83A-45(1) is met.

Subsection 83A-45(2) applies as only beneficial interests in ordinary shares of the Employer will be acquired under the Plan.

Subsection 83A-45(3) applies because the Employer does not have a predominant business of the acquisition, holding or sale of shares.

Subsection 83A-45(6) applies because the terms of the Trust are such that 'no Eligible Employee may acquire Units, by way of an Invitation or otherwise, if, immediately after the acquisition of those Units, the Eligible Employee would directly or indirectly hold or control a legal or beneficial interest in 10% or more of the issued capital of the Employer (including the voting rights that relate to those shares)' and it is assumed that immediately after The Employee acquires the Units he will not hold a beneficial interest in more than 10% of the shares in the Employer and will not be in a position to cast or control the casting of more than 10% of the maximum number of votes that might be cast at a general meeting of the company (taking into account and including any shares and any voting rights that he would have by exercising any rights he has over shares and the holdings of his associates).

The Trust Deed states that notwithstanding anything else express or implied in the Deed, the Plan must be available to at least seventy-five (75) percent of the permanent employees of the Employer who have completed as least 3 years of service (whether continuous or noncontinuous) with the Employer. Therefore, the Commissioner accepts the condition in subsection 83A-105(2) is met.

Under the terms of the Trust Deed a Participant can only redeem their Units on the first to occur of: when they (or the relevant employee) ceases employment with the Employer (or their Associated Company), the 15^th anniversary of the acquisition of the Units; and upon an Exit Event. Upon redemption the Units (except those where the employee acquired Units for market value) are subject to the Disqualifying Discounts. These Disqualifying Discounts effectively operate as an employment vesting condition. If the employee has ceased employment prior to the expiry of 12 months the employee will not be entitled to any Remaining Units and will forfeit their Units. Thus, employee Participants only become entitled to have their Units vest at a minimum after satisfying the employment condition for one year. Therefore, the Commissioner accepts that all such Units, and therefore, the underlying Shares are subject to a real risk of forfeiture for the purposes of subsection 83A-105(3).

For the avoidance of doubt, the Commissioner considers that if the employee has remained employed for one year since acquisition of the Units, then 10% of their Units will have vested and the underlying Shares are no longer subject to a real risk of forfeiture (and each subsequent year that the employee remains employed will result in an increased amount of Units (and Shares) vesting). We do not consider that clause X of the Trust Deed gives rise to a real risk of forfeiture of the Units because a Participant can retain their beneficial interest in the Shares on Resignation (i.e. irrespective of their reason for ceasing employment). It is not considered that the risk of forfeiture is anything more than a rare eventuality or possibility.

Further, the inability to redeem the Units until ceasing employment or on the 15^th anniversary (unless an Exit Event occurs) does not constitute a real risk of forfeiture. This merely restricts the employee's ability to deal with the underlying Share for a specified time (whether this is considered a genuine disposal restriction is considered later in these reasons).

Further and for the avoidance of doubt, we accept that that the accelerated vesting available in the case of an Exit Event will not affect this conclusion as we accept that it is limited to permitting early vesting in circumstances beyond the taxpayers control i.e. on a ASX listing, a Business Sale or a Share Sale, that there is no contrivance and employees will not routinely receive their shares (see example 1.10 in the EM).

Consequently, as all of the required conditions in subsection 83A-105(1) have been met, subdivision 83A-C will apply to the ESS interests acquired under the Plan.

Question 3

Summary

When The Employee acquires Units under the Plan, and assuming the deferred taxing point is not the 15th anniversary of the grant date under subsection 83A-115(6) of the ITAA 1997 nor in accordance with the 30-day rule in subsection 83A-115(3) of the ITAA 1997 and that an Exit Event has not occurred, the deferred taxing point under subsections 83A-115(4) and (5) of the ITAA 1997 will be the same time.

Detailed Reasoning

In relation to the ESS deferred taxing point for a share, section 83A-115 of the ITAA 1997 provides:

(1)  This section applies if the * ESS interest is a beneficial interest in a * share.

Meaning of ESS deferred taxing point

(2)  The ESS deferred taxing point for the * ESS interest is the earliest of the times mentioned in subsections (4) to (6).

(3)  However, the ESS deferred taxing point for the * ESS interest is instead the time you dispose of the interest, if that time occurs within 30 days after the time worked out under subsection (2).

No restrictions on disposing of share

(4)  The first possible taxing point is the earliest time when:

(a)  there is no real risk that, under the conditions of the * employee share scheme, you will forfeit or lose the * ESS interest (other than by disposing of it); and

(b) if, at the time you acquired the interest, the scheme genuinely restricted you immediately disposing of the interest--the scheme no longer so restricts you.

Cessation of employment

(5)  The 2nd possible taxing point is the time when the employment in respect of which you acquired the interest ends.

Maximum time period for deferral

(6)  The 3rd possible taxing point is the end of the 15 year period starting when you acquired the interest.

As per subsection 83A-115(2) of the ITAA 1997, the ESS deferred taxing point for an ESS interest that is a beneficial interest in a share is the earliest of the times set out in subsections 83A-115(4) to (6) of the ITAA 1997.

Genuine disposal restrictions

Restrictions or conditions preventing disposal will only be relevant to the determination of the ESS deferred taxing point if they existed when the taxpayer acquired the ESS interest. Restrictions that are added subsequent to acquisition are not relevant (see paragraph 1.197 of the EM).

Genuine restrictions preventing disposal could include a condition of the scheme that contractually prevents disposal of shares. A scheme does not genuinely restrict disposal of a share or right if you can take action to enable disposal of it. Whether you are able to take action is a question of fact.

A restriction that otherwise meets the conditions for a genuine disposal restriction, but is able to be lifted in exceptional circumstances, for example severe financial hardship, is nonetheless considered to be a genuine restriction.

A taxpayer will not be considered to be genuinely restricted from disposing of their shares or rights if they are able to transfer ownership to their spouse or a family trust or in other similar circumstances.

Application to your circumstances

Under the terms of the Trust Deed a Participant will only be permitted to deal with their Units (their interest in the underlying Shares) when the Shares are redeemed. Under the terms of the Trust Deed a Participant can only redeem their Units on the first to occur of: when they (or the relevant Eligible Employee) ceases employment with the Employer (or their Associated Company); the 15th anniversary of the acquisition of the Units; and upon an Exit Event. The disposal restrictions are able to be enforced because the Trustee holds the legal title to the Shares and the Participant has no ability to deal with the underlying Shares and is otherwise restricted from dealing with their Units and their interest in the Units under the terms of the Plan in the Trust Deed. The Participant is not able to request that the Units be redeemed at any other time under the Plan. Therefore, the scheme genuinely restricts the Participant from immediately disposing of their interest acquired under the scheme.

The disposal restriction is only lifted when the Units can be redeemed and the Participant can then request that the Trustee sell the Allocated Shares referable to the Remaining Units or Units held by the Trustee on behalf of the Participant and receive from the Trustee The Employee Redemption Amount (the cash value of the Allocated shares referable to the Remaining Units sold, net of any costs in relation to the selling of those Allocated Shares); or to transfer the Allocated Shares referable to the Remaining Units or Units held by the Trustee to the Eligible Employee or the Participant (excepting in the case of an Exit Event when the employee will receive the Redemption Amount).

Therefore, when the Units vest and the employee is considered no longer subject to a real risk of forfeiture (i.e. there is a percentage of Units that they could not forfeit other than in the limited circumstances in clause X), they will be considered to remain subject to a genuine disposal restriction until either: an Exit Event occurs; they cease employment; or the 15^th anniversary of the date of acquisition of the Units.

Therefore, assuming an Exit Event does not occur, the ESS deferred taxing point under subsections 83A-115(4) to (6) will be the earlier of:

•         when the Participant (or relevant employee) ceases employment (at which point the time in subsection 83A-115(4) and 83A-115(5) will occur); or

•         the 15th anniversary of the acquisition of the Units (at which point the time in subsection 83A-115(4) and 115(6) will occur).

However, the ESS deferred taxing point for the ESS interest will instead be the time when the Participant disposes of the interest, if that time occurs within 30 days after the time worked out above: subsection 83A-115(3).

Therefore assuming the ESS deferred taxing point is not the 15th anniversary of the grant date under subsection 83A-115(6) of the ITAA 1997 nor in accordance with the 30-day rule in subsection 83A-115(3) of the ITAA 1997 and that an Exit Event has not occurred, the ESS deferred taxing point under subsections 83A-115(4) and (5) of the ITAA 1997 will be the same time.

Question 4

Summary

The amount that will be included in the assessable income of The Employee at the ESS deferred taxing point, for each Unit will be the market value of the Share referrable to that Unit reduced by the cost base (if any) of the beneficial interest in the Share.

Detailed Reasoning

Subsection 83A-110(1) provides as follows:

Your assessable income for the income year in which the *ESS deferred taxing point for the *ESS interest occurs includes the *market value of the interest at the ESS deferred taxing point, reduced by the *cost base of the interest.

The ordinary meaning of market value is used for determining the value of ESS interests. The Commissioner has published Market valuation for tax purposes to assist taxpayers who need to value something (e.g. shares) for tax purposes.

The expression market value is used with its ordinary meaning, however, in some cases that meaning is affected by the rules in Subdivision 960-S of the ITAA 1997.

Subdivision 960-S provides that any conditions and restrictions that prevent a taxpayer from converting the ESS interest into money are ignored in calculating market value (see section 960-410).

Application to your circumstances

ESS deferred taxing point

The amount that will be included in the assessable income of The Employee at the ESS deferred taxing point, for each Unit will be the market value of the Share referrable to that Unit reduced by the cost base (if any) of the beneficial interest in the Share.

Question 5

Summary

The Employee Redemption Amount constitute assessable income of The Employee, even if he participates indirectly through an associate.

Detailed Reasoning

Subsection 83A-305(1) provides that if an associate (other than an employee share trust) of an individual acquires an ESS interest in relation to the individual's employment (including past or prospective employment), then, for the purposes of Division 83A:

a)         treat the interest as having being acquired by the individual (instead of the associate)

b)         treat any circumstance, right or obligation existing or not existing in relation to the interest in relation to the associate as existing or not existing in relation to the individual, and

c)         treat anything done or not done by or in relation to the associate in relation to the interest as being done or not done by or in relation to the individual.

An associate of an employee is defined in section 318 ITAA 1936 to include people and entities, such as relatives, partners or closely connected companies or trustees of a trust (other than the trustee of an employee share trust).

Application to your circumstances

The Trust Deed states the Units may be issued to an associate of an Eligible Employee. In accordance with subsection 83A-305(1) if an associate of The Employee acquires the ESS interests which are provided in relation to Mr Earls employment or services, the ESS rules require The Employee (rather than the associate) to include the discount in his assessable income.

In conclusion, The Employee Redemption Amount constitute assessable income of The Employee, even if he participates indirectly through an associate.

Question 6

Summary

In the event of a disqualifying event occurring in relation to Units held by The Employee section 83A-310 of the ITAA 1997 will operate to treat Division 83A to be taken to never have applied to the ESS interests represented by such units.

Detailed Reasoning

Section 83A-310 of the ITAA 1997 provides that Division 83A (apart from Subdivision 83A-E) is taken never to have applied in relation to an ESS interest acquired by an individual under an ESS if:

a)    disregarding this section, an amount is included in the individual's assessable income under this Division in relation to the interest; and

b)    either:

i)       the individual forfeits the interest; or

ii)       in the case of an ESS interest that it is a beneficial interest in a right - the individual forfeits or loses the interest without having disposed of the interest or exercised the right; and

c)    the forfeiture or loss is not the result of:

i)        a choice made by the individual (other than a choice by that individual to cease particular employment); or

ii)       a condition of the scheme that has the direct effect of protecting (wholly or partly) the individual against a fall in the market value of the interest.

Section 83A-310 of the ITAA 1997 therefore only applies to certain circumstances. For example, where the forfeiture or loss is the result of a choice made by the employee, then section 83A-310 of the ITAA 1997 will not apply.

The Explanatory Memorandum to the Tax Laws Amendment (2009 Budget Measures No.2) Bill 2009 (EM) explains that:

1.331 Whether or not forfeiture is as a result of a choice of an employee is something to be assessed on a case-by-case basis.

Application to your circumstance

In the event that the Units are forfeited section 83A-310 of the ITAA 1997 will apply and Division 83A (apart from Subdivision 83A-E) will be taken to have never applied to the ESS interest.

It is considered that in respect of the Units, if you choose to engage in behaviour or action that results in a 'Disqualifying Event', then section 83A-310 of the ITAA 1997 does not apply to you. This is because you have chosen to engage in action (or inaction) that has resulted in forfeiture of the Units.

Question 7

Summary

When The Employee acquires additional units at market value he is providing arms-length market value consideration for the acquisition of an asset, namely the unit. The acquisition is neither ordinary nor statutory income and the consideration provided is an outgoing and not assessable.

Detailed Reasoning

Assessable income includes both ordinary income and statutory income according to sections 6-5 and 6-10 of the ITAA 1997. Ordinary income is income according to ordinary concepts. Statutory income is income that is not ordinary income but is included in assessable income because of a specific provision of the ITAA 1997 or ITAA 1936.

When The Employee acquires additional units at market value he is providing arms-length market value consideration for the acquisition of an asset, namely the unit. The acquisition is neither ordinary nor statutory income and the consideration provided is an outgoing and not assessable.

Question 8

Summary

The Employee will not be liable for capital gains tax on any capital gain made upon the redemption of ordinary employee units, unless the redemption of ordinary units occurs after the deferred taxing point for the ESS interest.

Reason for Decision

Subdivision 130-D of the ITAA 1997 operates to recognise that Division 83A contains the primary rules for taxing gains on ESS interests acquired under employee share schemes and that capital gains and capital losses on such interests should usually be disregarded during the period in which Division 83A applies to them.

In particular section 130-80 of the ITAA 1997 operates to disregard any capital gain or capital loss to the extent it results from a CGT event (other than where the capital gain or loss results from CGT events E4, G1 or K8) if the CGT event happens in relation to an ESS interest you acquire under an employee share scheme and: if Subdivision 83A-C applies to the interest, the time of the acquisition is the time when the CGT event happens; or the CGT event happens on or before the ESS deferred taxing point for the interest.

As Subdivision 83A-C applies to the acquisition of ordinary units the effect of subsection 130-80 of the ITAA 1997 is to disregard the capital gain or capital loss from CGT events that happen from the time of acquisition up until the deferred taxing point. Once a deferred taxing point arises in respect of the unit section 83A-125 of the ITAA 1997 operates inter alia to reset the cost base of the unit at its market value unless the deferred taxing point occurs at the time the unit is disposed of.

Question 9

Where The Employee has paid market value for the acquisition of additional Units, he will be liable for capital gains tax on any capital gain made upon the redemption of Units.

Summary

As noted in the reasoning for question 8 above, section 130-80 of the ITAA 1997 only operates to disregard capital gains and capital losses where either Subdivision 83A-B or Subdivision 83A-C applies to the ESS interest.

Where a unit is acquired for market value (i.e. not at a discount) neither Subdivision 83A-B or 83A-C will apply.

Consequently, the acquisition of the Units (and underlying Shares) will constitute an acquisition of a CGT asset to which section 109-5 of the ITAA 1997 and the remainder of Part 3-1 and Part 3-3 will apply.

Question 10

Summary

The Commissioner will not make a determination that Part IVA of the ITAA 1936 applies to deny, in part or full, any tax benefit derived by The Employee a result of his participation in the Plan as described.

Detailed reasoning

A consideration of all the factors referred to in subsection 177D(2) of the ITAA 1936 leads to the conclusion that the dominant purpose of the scheme is to provide remuneration to The Employee in a form that promotes the Employer's business objectives, rather than to obtain a tax benefit.

Accordingly, the Commissioner will not make a determination that Part IVA of the ITAA 1936 applies to deny, in part or full, any tax benefit derived by The Employee a result of his participation in the Plan as described.