Edited version of private advice

Authorisation Number: 1051899536681

Date of advice: 15 September 2021

Ruling

Subject: Employee share scheme reporting obligations

Question

Will the option holders be required to include any amounts in their assessable income under Division 83A of the Income Tax Assessment Act 1997 (ITAA 1997) in the income year from 1 July 20XX to 30 June 20YY, for the purposes of determining the Company's reporting obligations under Division 392 of Schedule 1 to the Taxation Administration Act 1953 if the proposed transaction completes prior to 30 June 20YY?

Answer

No

This ruling applies for the following period periods:

Years ended 30 June 20WW, 30 June XX and 30 June YY

The scheme commences on:

1 July 20VV

Relevant facts and circumstances

Background

The taxpayer is an Australian resident private company (the Company).

The Company is not listed on any stock exchange.

The Company made grants of options to employees (participants) that were intended to qualify for the start-up concessions under Subdivision 83A-B of the ITAA 1997.

The grants of options (Options) were made under the Company Option Plan (the Plan). The Company issued options to employees to acquire ordinary shares in the Company (Shares) under the Plan.

The exercise price of the Options was greater than or equal to the market value of an ordinary share in the Company when the employees acquired the Options.

The Company had been incorporated for less than 10 years when the employees were granted options under the Plan.

The Company had an aggregated turnover not exceeding $XX million when the employees were granted the options under the Plan.

The Company is not predominantly a share trading or similar business.

At the time of grant none of the employees participating in the Plan held a beneficial interest in more than 10% of the Shares or were 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 they would have by exercising any rights they have over Shares and the holdings of their associates).

For the purpose of satisfying the 3-year minimum holding period requirement for options under the start-up concessions the Plan provides that a Participant must not dispose of his or her legal or beneficial interest in an Option or Share acquired on exercise of the Option (other than a disposal in accordance with section 83A-130 of the ITAA 1997) until the earlier of:

(a) 3 years after the issue of the Option or such earlier time as the Commissioner of Taxation allows in accordance with section 83A-45(5) of the ITAA 1997; and

(b) the date that the participant ceases to be employed or engaged by the Company.

The Company has stated that at all times the Company has operated the Plan such that all Options and Shares would not be permitted to be disposed of during the minimum holding period in accordance with the requirement in subsections 83A-45(4) and (5) of the ITAA 1997.

At the time all of the Options were issued under the Plan, the Company was not involved in or actively courting the Transaction or any other takeover bids.

The Transaction

The Company started negotiation with a third party in in respect of sale of all the shares in the Company.

As part of the negotiation, the third party (the Purchaser) is seeking to acquire 100% interest in the Company, without any the potential for this interest to be diluted by the exercise of options granted under the Plan.

The Options will be exercised, and Shares will be issued by the Company before the transaction. The Purchaser will be acquiring all the Shares in the Company at a fair market value.

The exercise of the Options and sale of the Shares in connection with completion of the Transaction fell within 3 years of the grant of all Options issued under the Plan.

The Commissioner has exercised his discretion to reduce the minimum holding period under subsection 83A-45(5) The Commissioner has allowed the minimum holding period to be the period starting when the Options were acquired and ending at the date on which the shares acquired on exercise of the Options are sold in connection with a 100% acquisition of the shares in the Company.

Relevant legislative provisions

section 83A-33 of the ITAA 1997

subsection 83A-45(4) of the ITAA 1997

subsection 83A-45(5) of the ITAA 1997

Reasons for decision

Division 83A of the ITAA 1997 applies to an ESS interest if the ESS interest is acquired under an employee share scheme at a discount.

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 an employee acquires an ESS interest under an employee share scheme and at a discount.

Unless Subdivision 83A-C applies, Subdivision 83A-B will apply and the discount will be included in an employee's assessable income when they acquire the ESS interest: subsection 83A-25(1) of the ITAA 1997.

However, an employee may be entitled to reduce the amount included in their assessable income if they meet one of two sets of conditions. In this case the relevant conditions are for ESS interests in start-ups under section 83A-33 of the ITAA 1997.

The Explanatory Memorandum for theTax and Superannuation Laws Amendment (Employee Share Schemes) Bill 2015 explains how the start-up concession operates as follows:

What is the small start-up concession?

1.70 The start-up concession provides that an employee does not include a discount on ESS interests acquired in their assessable income if the scheme meets certain conditions and their employer meets certain conditions. [Schedule 1, item 6, section 83A-33]

...

1.72 In relation to rights, the discount is not subject to upfront taxation and the right is then subject to capital gains tax with a cost base equal to the employee's cost of acquiring the right. [Schedule 1, items 4, 5 and 34, subsections 83A-30(2) and 130-80(4)]

1.73 There will be no capital gains tax on the exercise of rights and the resulting acquisition of shares (due to the availability of a capital gains tax rollover). However, upon exercise, the exercise price of the rights will form part of the cost base of the resulting shares.

1.74 The employee will generally include any capital gain in their assessable income (as part of working out their net capital gain or loss) on disposal of the resulting shares.

1.75 The capital gains tax discount rules (in Subdivision 115-A of the ITAA 1997) have been modified in relation to ESS interests that are rights to acquire shares and that benefited from the small start-up concession. When determining the acquisition time for a share that has been acquired by way of exercising a right that was an ESS interest subject to the small start-up concession, the time of acquisition for capital gains tax discount purposes is the time at which the right was acquired, and not the time at which the share was acquired. This will ensure that the capital gains tax discount is available so long as the right and underlying share are sequentially held for 12 months or more. [Schedule 1, item 31, item 9A in the table in subsection 115-30(1)]

1.76 The small start-up concession applies to the exclusion of all other ESS taxation rules. That is, those eligible for the small start-up concession cannot access either the $1,000 up-front concession or the deferred taxation concession. [Schedule 1, items 9 and 14, paragraphs 83A-35(2)(c) and 83A-105(1)(ab)]

ESS start-up concession

The ESS start-up concession within section 83A-33 provides for an employee to exclude a discount on ESS interests acquired from their assessable income, subject to certain conditions being met by the scheme and their employer. Section 83A-33 is applicable in relation to ESS interests acquired on or after 1 July 2015.

To be eligible for the 'start-up' tax concession certain eligibility criteria under section 83A-33 and the further conditions under section 83A-45 must be met.

Section 83A-33

Under the primary conditions in section 83A-33:

•         The company that grants the ESS interest (and its corporate group) must not have any interests listed on an approved stock exchange in the income year prior to the ESS interest being offered. (subsection 83A-33(2)).

•         The company (and its connected entities) must have been incorporated for less than 10 years (subsection 83A-33(3)).

•         The company that grants the ESS interests must have had an aggregated turnover not exceeding $50 million in the income year prior to the year the interests are granted. The turnover test includes connected entities (subsection 83A-33(4)).

•         In the case of an ESS for options (i.e. a beneficial interest in a right), the exercise price must not be less than the market value of shares in the company at the date of grant of the options (subsection 83A-33(5)).

•         In the case of an ESS that is a share plan, the shares must not be offered for more than a 15% discount on the market value of the shares at the date of grant (subsection 83A-33(5)).

•         The employing company (which can be a subsidiary of the company granting the ESS interests) must be an Australian resident taxpayer (subsection 83A-33(6)).

Application to the circumstances

•         In this instance the primary conditions under section 83A-33 are met for the Taxpayer.

•         Section 83A-45 criteria

•         In addition, there are further eligibility criteria set out under section 83A-45 that must be met, which are:

•         The acquirer must be employed by the company that issued the ESS interest, or a subsidiary of that company, when their ESS interest was acquired (subsection 83A-45(1)).

•         The ESS must only relate to the issue of "ordinary" shares (subsection 83A-45(2)).

•         The acquirer must satisfy an integrity rule that is designed to prevent contrived schemes which provide employees with shares in unrelated companies. Such schemes involve creating a company within the group that principally engages in trading or investing in the unrelated shares. The created company also employs the taxpayer under the scheme (subsection 83A-45(3)).

•         the scheme must be operated so that all the employees must hold the ESS interest (or any share acquired on exercise of an ESS interest that is a right) for three years or until the employee ceases employment - however, the Commissioner may reduce the minimum holding period in situations in which all employees are effectively required to exercise and/or dispose of their ESS interests under a 100% takeover provided certain conditions are met(subsection 83A-45(4)) and subsection 83A-45(5)).

•         There is a 10% limit on the shareholding and voting power that the employee/associate can have under the ESS - specifically, immediately after the employee acquires the interest they must not hold a beneficial interest in more than 10% of the shares in the company and 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 (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)).

Application to the circumstances

In this instance these conditions are met.

Reporting obligations

Division 392 of Schedule 1 to the TAA relates to employee share scheme reporting.

Section 392-5 of Schedule 1 to the TAA states that an entity must give a statement to the Commissioner and to an individual for a financial year if the entity provides ESS interests (to which subdivisions 83A-B or 83A-C apply) to the individual during the financial year, or if an ESS deferred taxing point for the ESS interests occurs during the financial year and Subdivision 83A-C applies.

The ESS statements must be in the approved form (subsection 392-5(2) of the TAA) and contain certain information as set out in the form (subsections 392-5(3) and (4)).

Paragraph 392-10(1) of Schedule 1 to the TAA states that if the provider becomes aware of a material change or material omission in any information given to the individual or the Commissioner under Division 392 of Schedule 1 to the TAA, the provider must:

(a)  tell the individual or Commissioner, as applicable, of the change in the approved form; or

(b)  give the omitted information to the individual or the Commissioner, as applicable, in the approved form.

The approved forms (ESS statement and ESS Annual Report) requires the provider to provide information about options issued under the start-up concession for the year in which they are acquired. As the amount required to be included in the employee's assessable income is reduced to nil under section 83A-33 of the ITAA 1997, the employee will not include any amount in their assessable income for the year of acquisition.

The ESS interests meet the conditions for the start-up concession as concluded above. The reporting obligation of the Company is to report in the ESS Statement and ESS Annual Report the provision of the Options under the start-up concession for the year in which the Options were acquired. The Company does not have any further reporting obligations under Division 392 of the TAA.