Edited version of private advice

Authorisation Number: 1051930568941

Date of advice: 21 Decenber 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 Tax Administration Act 1953 (TAA) as a result of the transfer of all the Options to the Purchaser?

Answer

No

This ruling applies for the following period:

An income year

The scheme commenced during:

An income year

Relevant facts and circumstances

Employee Share Option Plan

The Company is an Australian resident private company.

The Company established the Employee Share Option Plan (the Plan) under which each eligible employee received an individual offer (Offer Letter) inviting the employee to participate in the Plan.

The Plan is operated in accordance with the Employee Share Option Plan Rules (the Plan Rules).

Upon accepting the Offer Letter, the eligible employees (the Participants) agreed to be bound by the stipulated the terms of the respective grant of options under the Plan (the Options).

The exercise price of each Option is equal to the market value of the ordinary shares in the Company at the time the Options are issued.

Upon exercise of their Options (subject to the relevant vesting conditions), Participants can acquire fully paid ordinary shares in the Company under the Plan.

The Offer Letter stipulates that Participants are restricted from disposing of either the Options or shares they acquire on the exercise of the Options. The shares or Options cannot be disposed of until the earlier of:

•         Three years from the date of grant; or

•         Cessation of employment; or

•         An exit event (assuming this is earlier than the date which is three years from the date of grant and that earlier date is allowed by the Commissioner of Taxation).

The Plan Rules provides that offers are intended to qualify for the start-up concessions under section 83A-33 of the Income Tax Assessment Act 1997 (ITAA 1997), or where the conditions cannot be satisfied Subdivision 83A-C should apply.

Apart from subsection 83A-45(4) of the ITAA 1997, all Options 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-33(1).

The Company provided statements for the Options in accordance with section 392-5 of Schedule 1 to the TAA which specified details of the acquisition of Options acquired under the start-up concession.

The Transaction

The Company entered into discussions with the Purchaser for acquisition of all the shares and Options in the Company.

No interests were allocated to Participants under the Plan Rules after discussions commenced with the Purchaser.

All shares and Options in the Company were subsequently acquired by the Purchaser pursuant to a Share Purchase Agreement.

Relevant legislative provisions

TAA 1953 subsection 392-5(1) of Schedule 1

TAA 1953 subsection 392-5(2) of Schedule 1

TAA 1953 subsection 392-5(3) of Schedule 1

TAA 1953 section 392-10 of Schedule 1

ITAA 1997 subsection 83A-25(1)

ITAA 1997 subsection 83A-33(1)

ITAA 1997 subsection 83A-45(4)

ITAA 1997 subparagraphs 83A-45(5)(a)

ITAA 1997 subparagraphs 83A-45(5)(a)

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 of the ITAA 1997 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 details of the acquisition of options acquired under the start-up concession.

Under the Plan Rules, the Company provided Options to Participants at a discount which were taxed under Subdivision 83A-B of the 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 as all of the requirements in subsection 83A-33(1) of the ITAA 1997 were satisfied.

Accordingly, the Company provided statements for the Options in accordance with section 392-5 which specified details of the acquisition of options acquired under the start-up concession.

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.

Pursuant to the Share Purchase Agreement, the Purchaser acquired 100% of the shares and Options 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.

Minimum holding period

Amongst the conditions that must be met for section 83A-33 of the ITAA 1997 to operate are those contained in section 83A-45. Apart from subsection 83A-45(4) of the ITAA 1997, all Options 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-33(1).

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 Share Purchase Agreement, 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 the Options granted under the Plan to be reduced.

As the Offer Letter 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.

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 Options that qualify for concessional treatment under section 83A-33 to be reduced.

Conclusion

All Options 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-33(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.