Edited version of private advice

Authorisation Number: 1051912671872

Date of advice: 15 November 2021

Ruling

Subject: Employee share schemes - reporting obligations

Question

Will the Company have an obligation to provide the Commissioner and Participants with amended Employee Share Scheme (ESS) statements under section 392-10 of Schedule 1 to the Taxation Administration Act 1953 as a result of the Scheme of Arrangement?

Answer

No

This ruling applies for the following period:

A number of income years

The scheme commenced during:

An income year

Relevant facts and circumstances

The Company

1. The Company was a widely held public company limited by shares and was listed on the Australian Securities Exchange (ASX).

Employee Share Offer

2. The Company established the Employee Share Offer (ESO) under which its employees were offered a grant of shares in the Company (Plan Shares). The ESO is operated in accordance with the Company's Share Plan Rules (the Plan Rules).
3. The ESO is operated on a yearly basis with the Company inviting eligible employees to participate for that financial year. Upon accepting the offer, the employees (the Participants) agreed to forego up to $1,000 of their total remuneration, by way of salary sacrifice, in return for the Company granting them with Plan Shares of a similar value.
4. The salary sacrifice amount is deducted by an equal amount each pay period during the salary sacrifice period, i.e. the income year, with Plan Shares being issued and registered in the Participants' names quarterly during the income year.
5. In order to ensure that the total value of Plan Shares acquired by a Participant during the income year does not exceed $1,000, the quantum of Plan Shares acquired by the Participants is determined on the day that they are registered in the Participants' names by reference to the applicable tax market value.
6. Subdivision 83A-B of the Income Tax Assessment Act 1997 (ITAA 1997) applies to the Plan Shares and not Subdivision 83A-C.
7. The Plan Rules provide a restriction on disposal of Plan Shares for the duration of the three year trading restriction period.
8. Plan Shares were granted to Participants pursuant to the ESO during a number of income years. The grant of Plan Shares was governed by the Plan Rules. Upon accepting the offer to participate in the ESO, the Participants agreed to be bound by the terms of the Plan Rules.
9. The Company provided statements for the Plan Shares in accordance with section 392-5 of Schedule 1 to the Taxation Administration Act 1953 which specified the applicable amount that was eligible for reduction.
10. Apart from subsection 83A-45(4) of the ITAA 1997, all Plan Shares granted under the ESO satisfied the requirements to allow the amount to be included in assessable income to be reduced in accordance with subsection 83A-35(1).

The Scheme of Arrangement

11. The Purchaser is a public company incorporated in Australia and listed on the ASX.
12. Following discussions initiated by the Purchaser for the acquisition of 100% of the shares in the Company, the Company publicly announced that it had entered into a binding Scheme Implementation Agreement with the Purchaser for the acquisition of 100% of the shares in the Company by way of a Scheme of Arrangement (the Scheme).
13. The Company suspended the ESO following the announcement of the Scheme.
14. Upon implementation of the Scheme, the Purchaser acquired all ordinary shares in the Company, including all Plan Shares.

Relevant legislative provisions

Subsection 392-5(1) of Schedule 1 to the Taxation Administration Act 1953 (TAA)

Subsection 392-5(2) of Schedule 1 to the TAA

Subsection 392-5(3) of Schedule 1 to the TAA

Section 392-10 of Schedule 1 to the TAA

Subsection 83A-25(1) of the Income Tax Assessment Act 1997 (ITAA 1997)

Subsection 83A-35(1) of the ITAA 1997

Paragraph 83A-35(2)(a) of the ITAA 1997

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

Subparagraphs 83A-45(5)(a) of the ITAA 1997

Section 83A-340 of the ITAA 1997

Subsection 83A-340(2) of the ITAA 1997

Reasons for decision

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

ESS reporting requirements

Subsection 392-5(1) imposes reporting obligations on a company that provides ESS interests to individuals, where subdivision 83A-B applies in determining the tax consequences.

Subsection 392-5(2) specifies that the statement must be provided in a form approved by the Commissioner, containing any required information or signed declarations.

Whilst subsection 392-5(3) outlines some of the particular information that the Commissioner may require in the approved form, paragraph 1.291 of the Explanatory Memorandum to the Tax Laws Amendment (2009 Budget Measures No. 2) Bill 2009 also provides:

The legislative guidance that is provided on what the Commissioner may require in the approved form does not in any way limit the information that the Commissioner may or may not require.

The approved form requires providers to report the amount of 'discount from taxed upfront schemes - eligible for reduction'.

The Company provided Plan Shares to Participants at a discount which were taxed under Subdivision 83A-B of the Income Tax Assessment Act 1997 (ITAA 1997) and as such, the Company had a reporting obligation under section 392-5.

Participants were entitled to reduce the amount of the discount included in their assessable income under subsection 83A-25(1) of the ITAA 1997 by up to $1,000 as at that time, all of the requirements in subsection 83A-35(1) were satisfied.

Accordingly, the Company provided statements for the Plan Shares in accordance with section 392-5 which specified the discount amount that was taxed under Subdivision 83A-B of the ITAA 1997 and eligible for a reduction under subsection 83A-35(1).

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.

Upon implementation of the Scheme, all issued shares in the Company were disposed of to the Purchaser, which acquired 100% of the membership interests in the Company on completion of the transaction.

As such, it is necessary to determine whether this constitutes a material change to the statements provided under section 392-5 resulting in the Company having an obligation under section 392-10 to make an amendment to the section 392-5 statements previously provided.

Amongst the conditions that must be met for section 83A-35 of the ITAA 1997 to operate are those contained in section 83A-45. Apart from subsection 83A-45(4) of the ITAA 1997, all Plan Shares granted under the ESO satisfied the requirements to allow the amount to be included in assessable income to be reduced in accordance with subsection 83A-35(1).

Minimum holding period

The minimum holding period provisions are detailed in subsections 83A-45(4) and (5) 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 three 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 the Company were acquired pursuant to the Scheme of Arrangement as stated by the Company, then the remaining consideration is whether the operators of the scheme intended for subsection 83A-45(4) of the ITAA 1997 to apply to the ESS interests during the three years after the acquisition of the interests.

The operators of the scheme would fail the test if they had either:

•                 allowed participants to dispose of their interests prior to the end of their minimum holding period, or

•                 there was objective evidence that the scheme was not operated to prevent the participants from doing so.

Accordingly, the Commissioner will consider whether to exercise his discretion under subsection 83A-45(5) of the ITAA 1997 to allow the minimum holding period for Plan Shares granted under the Plan to be reduced.

As the Plan Rules specifies a minimum holding period of three years and there is no evidence that any such disposal has been allowed, there is objective evidence that the scheme operated to prevent the Participants from disposing of their interests before the end of the minimum holding period.

The Participants acquired indeterminate rights under section 83A-340 of the ITAA 1997 when they accepted the offer to participate in the ESO as the total value of the Plan Shares that they would receive was specified but the quantum of Plan Shares was not known until the Plan Shares were issued and registered in their names quarterly during the income year.

Subsection 83A-340(2) of the ITAA 1997 provides that Division 83A applies as if the right had always been a right to acquire the beneficial interest in the share. As a result, the indeterminate right is acquired by the Participants at the time that they accept the Company's offer to participate in the ESO. Offers to participate in the ESO were made by the Company and accepted by the Participants prior to the Purchaser approaching the Company to commence discussions regarding the acquisition of shares in the Company

Where interests were allocated after the time that it became clear that a sale to the Purchaser was imminent the Commissioner would not accept that the scheme was operated to prevent the Participants from disposing of their interests before the end of the minimum holding period.

As this is not the case, 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 Plan Shares that qualify for concessional treatment under section 83A-35 to be reduced.

Conclusion

All Plan Shares granted under the Employee Share Offer (ESO) 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.

As such, the Commissioner is satisfied that there have been no material changes to the statements provided under 392-5 and the Company does not have an obligation under 392-10 to make an amendment to the section 392-5 statements previously provided.