Edited version of private advice

Authorisation Number: 1051993612800

Date of advice: 23 June 2022

Ruling

Subject: Employee share schemes

Question

Can the deferred taxing point for your employee share scheme interests under Subdivision 83A-C of the Income Tax Assessment Act 1997 be changed from the date the cessation of your employment occurred to the respective expiry dates of the employee share scheme interests?

Answer

No. There are no legislative provisions, and the Commissioner does not have any discretion to exercise, that would allow for the earliest deferring taxing point that occurred on cessation of your employment to be substituted for another potential deferred taxing point that would occur at a later date, such as when the employee share scheme interests expire.

This ruling applies for the following period:

Income year ending 30 June 20XX.

The scheme commences on:

1 July 20XX.

Relevant facts and circumstances

You were an employee of Company A and participated in their employee share scheme which was a deferral scheme.

You were granted ESS interests under Company A's employee share scheme:

•         in numerous grants on various dates during several income years

•         with different expiry dates for the various grants

•         for nil consideration; and

•         with the majority of grants not having any exercise price.

You received a letter from Company A advising that your position with them was being made redundant effective from Date 1, which would be your final day of employment with them.

Company A issued you an Employee Share Scheme Statement for the 20XX-XX income year which:

•         outlined that you had an ESS discount amount in that income year

•         provided a calculation for the ESS discount amount which showed that the deferred taxing point for some of your ESS interests had occurred when they had been exercised, Date 2, with the other deferred taxing point occurring when your employment ended on Date 1.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 Subdivision 83A-C

Income Tax Assessment Act 1997 Section 83A-120

Reasons for decision

Deferral employee share schemes

The employee share scheme (ESS) provisions are contained in Division 83A of the Income Tax Assessment Act 1997 (ITAA 1997) which applies to shares, rights (options) and stapled securities acquired under an ESS.

Subdivision 83A-C of the ITAA 1997 applies to ESS interests acquired under a tax-deferred ESS, which are assessed for tax purposes in the income year in which the deferred taxing point (DTP) occurs.

Section 83A-120 of the ITAA 1997 changed in relation to ESS rights granted from 1 July 2015.

The DTP for an ESS interest that is a beneficial interest in a right to acquire a share that was granted on or after 1 July 2015 will be the earliest of the times in accordance with subsections 83A-120(4) to (7) of the ITAA 1997, summarised as follows:

•         When the employee ceases the relevant employment (subsection 83A-120(5) of the ITAA 1997)

•         The end of the 15-year period starting when the employee acquired the ESS interest (subsection 83A-120(6) of the ITAA 1997)

•         When the ESS interest has not been exercised, there is no real risk of forfeiting the ESS interest, and the scheme no longer genuinely restricts disposal of the ESS interest (subsection 83A-120(4) of the ITAA 1997)

•         When the ESS interest is exercised and there is no real risk of forfeiting the share and the scheme no longer genuinely restricts disposal of the share (subsection 83A-120(7) of the ITAA 1997).

Section 83A-120 of the ITAA 1997 was amended by Act No 8 of 2022 to repeal subsection 83A-120(5) of the ITAA 1997, thereby removing cessation of employment as a taxing point for ESS interests subject to deferred taxation, effective 1 April 2022.

This amendment applies to ESS interests that had not reached their taxing point as at 1 July 2022. For ESS interests that had a DTP prior to 1 July 2022, the old provisions contained in subsection 83A-120(5) of the ITAA 1997 will continue to apply, where cessation of employment can be the earliest DTP if that occurred prior to 1 July 2022.

Application to your situation

In your situation you were granted ESS interests under a deferral ESS. When determining when the DTPs for your ESS interests may have occurred, you exercised some of the ESS interests during the ruling period and your employment had also ended during the same income year.

The other two potential times when a DTP could have occurred in relation to your ESS interests had not occurred during the ruling period, or at an earlier time.

Therefore, the DTPs occurred during the ruling period as follows:

•         for the ESS interests exercised during the ruling period, the date they were exercised, being Date 2; and

•         for your other ESS interests, on the cessation of your employment on Date 1.

We do not have any legislative provision/s, and the Commissioner doesn't have any discretion/s that could be exercised, to enable you to change the date the DTP that occurred in relation to some of your ESS interests when you ceased employment from the date your employment ceased on Date 1 to when the later expiry dates of the relevant ESS interests were to occur.

Therefore, as your employment ceased prior to 1 July 2022 when the legislation was amended as outlined above, the DTPs for your ESS interests during the ruling period occurred on Date 2 when you exercised some of your ESS interests and on Date 1 when you ceased your employment as that is when the earliest DTPs occurred in relation to those ESS interests.

Accordingly, you will need to include the full ESS discount amount as outlined in the ESS Statement in your income tax return for the income year covered by this ruling.