Edited version of private advice

Authorisation Number: 1051902241579

Date of advice: 18 October 2021

Ruling

Subject: Administration - approved forms - employee share schemes

Question 1

Will Company A have an obligation to provide the Commissioner and its employees with an amended ESS statement under section 392-10 of Schedule 1 to the Taxation Administration Act 1953?

Answer

No

This ruling applies for the following period:

Income year ended 30 June 2022

The scheme commences on:

1 July 2021

Relevant facts and circumstances

All legislative references are to Schedule 1 to the Taxation Administration Act 1953 unless otherwise specified.

Company A is a resident of Australia as defined in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936).

Company B is a resident of Australia as defined in subsection 6(1) of the ITAA 1936.

Company A Employee Share Plan

The Company A Employee Share Plan (Plan) was established as a broad-based employee share plan available to all eligible employees to acquire ordinary shares (Shares) in Company A in lieu of a cash bonus up to $1,000 per year as part of their remuneration.

The Plan is operated in accordance with the Company A Employee Share Plan Rules (Plan Rules):

•         an eligible employee is defined as a permanent full-time or permanent part-time Employee of Company A who has completed not less than 12 Months of continuous or non-continuous service as determined by Company A in its absolute discretion, but excluding Directors (Eligible Employee)

•         an Eligible Employee may make an application for the Shares specified in the offer. By submitting an application in accordance with the Plan Rules, the Eligible Employee agrees to bound by the Plan Rules

•         the allotment of Shares may, at Company A's discretion, be by way of issue of new Shares or by purchase by Company A of Shares, in the Eligible Employee's name and on the Eligible Employee's behalf. An Eligible Employee who accepts an offer and is allotted Shares under the Plan is defined as a participant (Participant)

•         each Participant shall have legal and beneficial ownership of the Shares allotted but any disposal of those Shares by that Participant shall be restricted in accordance with the Plan Rules, and

•         any Share allotted to a Participant under the Plan must not be disposed of by that Participant until the earlier of:

o    the expiration of the period of 3 years commencing at the time of acquisition of the Share by the Participant; and

o    the Participant ceasing his or her employment with Company A.

Subdivision 83A-B of the ITAA 1997 applies to the Shares and not Subdivision 83A-C of the ITAA 1997.

Company A provided statements for the Shares in accordance with section 392-5 which specified that the discount amount required to be included in assessable income could be reduced by an amount of up to $1,000 (where applicable).

Apart from subsection 83A-45(4), all Shares granted under the Plan satisfied the requirements to allow the amount to be included in assessable income to be reduced in accordance with subsection 83A-35(1) of the ITAA 1997.

Scheme of Arrangement

Company A entered into a Scheme Implementation Agreement with Company B under which, upon completion of the Scheme of Arrangement, Company B acquired 100% of the membership interests in Company A. Company B also acquired all Shares received by Participants under the Plan, whereby Shares granted to Participants under the Plan were transferred to Company B and in return Participants received Company B shares.

The Company A Board amended the restrictive period in the Plan Rules to allow Eligible Employees who held Company A Shares for less than 3 years to dispose of their Shares under the Scheme of Arrangement.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 subdivision 83A-B

Income Tax Assessment Act 1997 section 83A-25

Income Tax Assessment Act 1997 subsection 83A-25(1)

Income Tax Assessment Act 1997 section 83A-35

Income Tax Assessment Act 1997 subsection 83A-35(1)

Income Tax Assessment Act 1997 paragraph 83A-35(1)(a)

Income Tax Assessment Act 1997 subsection 83A-35(2)

Income Tax Assessment Act 1997 paragraph 83A-35(2)(a)

Income Tax Assessment Act 1997 paragraph 83A-35(2)(b)

Income Tax Assessment Act 1997 section 83A-45

Income Tax Assessment Act 1997 subsection 83A-45(4)

Income Tax Assessment Act 1997 subsection 83A-45(5)

Income Tax Assessment Act 1997 paragraph 83A-45(5)(a)

Income Tax Assessment Act 1997 subparagraph 83A-45(5)(a)(i)

Income Tax Assessment Act 1997 subparagraph 83A-45(5)(a)(ii)

Income Tax Assessment Act 1997 Subdivision 83A-C

Taxation Administration Act 1953 Schedule 1 Division 392

Taxation Administration Act 1953 Schedule 1 subsection 392-5(1)

Taxation Administration Act 1953 Schedule 1 paragraph 392-5(1)(a)

Taxation Administration Act 1953 Schedule 1 subsection 392-5(2)

Taxation Administration Act 1953 Schedule 1 section 392-10

Reasons for decision

Question 1

Summary

No, Company A will not have an obligation to provide the Commissioner and its employees with an amended ESS statement under section 392-10.

Detailed reasoning

Employee Share Scheme (ESS) reporting requirements

Section 392-5 imposes a requirement on the provider of an ESS interest under an employee share scheme (scheme) to provide statements to both the Commissioner and the employee who acquires (or whose associate acquires) the ESS interests. The section also sets out information that may be included in the approved form for statements and the due dates by which they must be provided.

Generally, subsection 83A-25(1) of the ITAA 1997 requires that an individual include the discount in their assessable income for the income year in which the ESS interest is acquired.

If the requirements of subsection 83A-35(1) of the ITAA 1997 are satisfied, an individual can reduce the amount of the discount included in their assessable income under subsection 83A-25(1) of the ITAA 1997. Paragraph 83A-35(2)(a) of the ITAA 1997 does not allow them to reduce that amount by more than $1,000.

During the income year ended 30 June 2021, Company A provided Shares to Participants at a discount which were taxed under Subdivision 83A-B of the ITAA 1997. As such, Company A had a reporting obligation under section 392-5 which it satisfied by providing statements in accordance with section 392-5.

Amendments to ESS statements

If a company becomes aware of any material change to, or omission from any information given to its employees under Division 392, then it is required to advise the Commissioner or employees, as applicable, of the change or provide the omitted information to the Commissioner or employees, as applicable, under section 392-10.

All issued shares in Company A were disposed of to Company B, which acquired 100% of the membership interests in Company A on completion of the Scheme of Arrangement.

As such, it is necessary to determine whether this constitutes a material change or omission to the statements provided under section 392-5, due to the shares acquired under the Plan being disposed of within the minimum holding period of 3 years from the date acquired.

Minimum holding period

The conditions that must be met for section 83A-35 of the ITAA 1997 to apply are set out in section 83A-45 of the ITAA 1997.

Subsection 83A-45(4) of the ITAA 1997 requires the scheme to be operated, at all times during the minimum holding period of the ESS interest, on the basis that all Participants acquiring an ESS interest under the scheme are constrained from disposing of their ESS interest during the ESS interest's minimum holding period. An ESS interest's minimum holding period starts when the ESS interest is acquired under the scheme and ends 3 years later or when the employee's employment ceases, whichever is earlier (subsection 83A-45(5) of the ITAA 1997).

Given that all the membership interests in Company A were acquired pursuant to the Scheme of Arrangement, Shares granted under the Plan were disposed of by the Participants within the 3 year minimum holding period.

However, the Commissioner can exercise his discretion under subsection 83A-45(5) of the ITAA 1997 to allow the 3 year minimum holding period to be reduced if the conditions in paragraph 83A-45(5) of the ITAA 1997 are satisfied.

The Plan operated such that all Shares would not be permitted to be disposed of during the 3 year minimum holding period, in accordance with the requirement in subsections 83A-45(4) and (5) of the ITAA 1997. The Plan Rules did not provide for an exemption from, or for non-compliance with, the disposal restrictions outlined in the Plan.

The disposal restrictions evidence that the scheme was operated in such a way to prevent the Participants from disposing of their interests before the end of the minimum holding period.

Offers made by Company A to participate in the Plan were accepted by Participants prior to Company B approaching Company A to commence discussions regarding the acquisition of shares in Company A.

As the ESS interests were allocated prior to this time, the Commissioner finds the requirements of subparagraphs 83A-45(5)(a)(i) and (ii) of the ITAA 1997 to be satisfied. The Commissioner will exercise his discretion under paragraph 83A-45(5)(a) of the ITAA 1997 to allow the minimum holding period for Shares that qualify for concessional treatment under section 83A-35 of the ITAA 1997 to be reduced.

As such, Company A does not have an obligation under 392-10 to make an amendment to the section 392-5 statements previously provided to Participants.