Edited version of your private ruling

Authorisation Number: 1051946697733

Date of advice: 4 February 2022

Ruling

Subject: Commissioner's discretion under paragraph 83A-45(5)(a) of the Income Tax Assessment Act 1997

Question

Will the Commissioner exercise his discretion under paragraph 83A-45(5)(a) of the Income Tax Assessment Act 1997, to allow the minimum holding period for options held by the Qualifying Optionholders to end onthe date of completion of the Share Sale?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

XYZ Pty Ltd (XYZ) is an Australian proprietary limited company.

XYZ is in the business of developing, marketing, licensing, selling, commercialising and hosting a booking platform.

The issued share capital of XYZ involves various numbers of:

•         ordinary shares;

•         class A-B preference shares;

•         class A preference shares; and

•         class B preference shares.

Employee Share Option Plan

XYZ adopted an Employee Share Option Plan (the Plan) on or about 29 June 20XX. The primary objective of the Plan was to facilitate the retention of staff. The Plan was amended on 7 April 20XX, 4 June 20XX, 5 November 20XX and 11 February 20XX.

The Plan was managed by XYZ's board who had discretion with respect to which employees, consultants and directors may participate in the Plan and the terms of offers made to those participants.

Options issued to participants in the Plan only vested while the participant is employed by, provides consultancy services to, or is an advisory board member of, XYZ or a subsidiary of XYZ per rule 2.1(c)(i)(A) of the Plan.

Options vested on the basis of the number of hours worked for part-time employees and did not vest during unpaid leave per rules 2.1(c)(i)(B) and (C) of the Plan.

Options issued to participants in the Plan vested primarily per rule 2.1(c)(ii) of the Plan as follows:

•         25% of the Options 12 months after the Grant Date of those options; and

•         75% of the Options, after those 12 months, on a quarterly basis over a further 3 years.

Options could also vest under the Plan over shorter periods of time as a result of those Options being granted either in lieu of salary or as a bonus.

Rule 4.2 of the Plan provided:

Unless otherwise consented to by the Board in writing (which consent may be given in the Board's absolute discretion, and may be given subject to conditions) and notwithstanding any other provision in this Employee option plan but subject to rule 4.3, a legal or a beneficial interest in an Option or an Option Share may not be Disposed of until after:

(a) where a Listing occurs, the earlier of:

(i) the date that is one hundred and eighty (180) days following the Listing; and

(ii) the expiration of any underwriter imposed lock-up in connection with the Listing; and

(b) where an Exit Event other than a Listing occurs, the occurrence of that Exit Event.

An Exit Event is:

              i.        a "Listing";

             ii.        a "Business Sale"; and

            iii.        a "Share Sale".

A "Share Sale" is defined as 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 Reconstruction will constitute a Share Sale. A "Shareholder" is a person who is the registered holder of a Share, and a "Reconstruction Event" means the reconstruction of the Company involving holders of Shares exchanging those Shares for equity securities in a New Holding Entity such that the equity security holders of the New Holding Entity are, or after the reconstruction become, the same or substantially the same as the former holders of Shares.

Rule 4.3 of the Plan provided:

Unless an Optionholder disposes of an Option or an Option Share under an arrangement which meets the requirements in section 83A-130 of the Tax Act, a legal or a beneficial interest in an Option or an Option Share may not be Disposed of pursuant to rule 4.2 until the earlier of:

                           iv.        3 years after the grant of the Option or such earlier time as the Commissioner of Taxation allows in accordance with section 83A-45(5) of the Tax Act; and

                             v.        a Trigger Event (as defined In rule 3.1(b)).

A Trigger Event is where an Optionholder becomes a "Leaver". An Optionholder is a "Leaver" if the Optionholder ceases to be employed or contracted by, or ceases to be a director or advisory board member of, a Company Group Member. If an Optionholder is a trust company or nominee for the Eligible Person then this rule applies as if the Optionholder is the Eligible Person.

Prior to the Share Sale (outlined below), the Board has never exercised their discretion to allow for the disposal of an Option or Option Share within the 3 year holding period.

Prior to the Share Sale, there was no disposal of Options or Option Shares as a result of a Trigger Event or Exit Event.

XYZ and the Plan are compliant with the conditions for the start-up concession under section 83A-33 of the Income Tax Assessment Act 1997 (ITAA 97).

Share Sale

During January 20XX, the Purchasing Company purchased all issued shares in XYZ under a Share Sale Agreement (the Share Sale). As part of the Share Sale:

•         all unvested Options that had not already lapsed vested as a result of the sale, with the XYZ board notifying Optionholders of the number of unvested Options that would vest as a result of the sale; and

•         XYZ bought back and cancelled all of the vested Options, simultaneously with the sale of all XYZ Shares by the XYZ shareholders and pursuant to the terms of the Share Sale Agreement.

The Share Sale constituted an Exit Event.

Purchasing Company is an unrelated party to the XYZ Shareholders and the Share Sale Agreement has been entered into on an arm's length basis.

Qualifying Optionholders

Some of the vested Options bought back and cancelled by XYZ as part of the Share Sale have been held by their respective Optionholders for less than three years.

The term Qualifying Optionholders in this private ruling refers to employees of XYZ who:

•         acquired Options (or are treated as having acquired Options for the purposes of Division 83A by the application of section 83A-305 of the ITAA 1997) under the Plan between 2016 and 2021;

•         were Australian tax residents within the meaning of subsection 6(1) of the Income Tax Assessment Act 1936 at the time they acquired the Options, and remained Australian tax residents until completion of the Share Sale Agreement;

•         were not temporary residents within the meaning of subsection 995-1 of the ITAA 1997;

•         were employed by XYZ at all times from the acquisition date of the Options until completion of the Share Sale Agreement;

•         upon acquiring the Options did not hold (for the purposes of Division 83A) a beneficial interest in more than 10 percent of the shares, or rights to acquire shares, in XYZ;

•         were not in a position to cast, or control the casting of, more than 10 percent of the maximum number of votes that might be cast at a general meeting of XYZ; and

•         held their Options (for the purposes of division 83A) at all times from the date of acquisition of the Options until the completion of the Share Sale.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 6(1)

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 Section 83A-33

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

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

Income Tax Assessment Act 1997 Section 83A-305

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

Subsection 83A-33(5) of the ITAA 1997 provides:

An ESS interest's minimum holding period is the period starting when the interest is acquired under the employee share scheme and ending at the earlier of:

(a) 3 years later, or such earlier time as the Commissioner allows if the Commissioner is satisfied that:

(i) the operators of the scheme intended for subsection (4) to apply to the interest during the 3 years after the acquisition of the interest; and

(ii) at the earlier time that the Commissioner allows all membership interests in the relevant company were disposed of under a particular scheme:

(b) when the acquirer of the interest ceases being employed by the relevant employer.

All the membership interests in XYZ are acquired under the Share Sale. The remaining thing to be determined is whether the operators of the scheme intended for subsection (4) to apply to the interest during the 3 years after the acquisition of the interest.

The operators of the scheme would fail the test if they had either allowed a participant to dispose of their interest prior to the end of its minimum holding period or there was objective evidence that the scheme was not operated to prevent the participants from doing so.

The rules of the Plan prevent disposals except in specific circumstances. There is no evidence that any such disposal has been allowed. The only remaining consideration is whether there is objective evidence that the scheme was not operated to prevent the participants from disposing of their interests before the end of the minimum holding period.

Objectively the Commissioner would not accept that that the scheme was 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 takeover was imminent.

As the evidence indicates that this is not the case the Commissioner will exercise his discretion to allow the minimum holding period for Options disposed of by Qualifying Optionholders to end on the date of completion of the Share Sale.