Edited version of private advice

Authorisation Number: 1052047396665

Date of advice: 31 October 2022

Ruling

Subject: Assessable income - special payment

Question 1

Are the cash award payment and options received by the taxpayer assessable under section 6-5?

Answer

No. The cash award payment and options were provided to terminate your founding/existing equity in the business (i.e. a capital asset). Therefore, the cash award payment and options are not considered to be ordinary income for the purposes of section 6-5.

Question 2

Are the cash award payment and options received by the taxpayer assessable under section 15-2?

Answer

No. The cash award payment and options were provided to terminate your founding/existing equity in the business (i.e. a capital asset). Therefore, we consider that the cash award and options are not allowances or other things provided in connection with your employment for the purposes of section 15-2

Question 3

Are the options received by the taxpayer assessable under the employee share scheme (ESS) rules in section 83A?

Answer

No. The options were provided to terminate your founding/existing equity in the business (i.e. a capital asset). Therefore, we consider that you have not been provided ESS interests in relation to your employment and the condition in subsection 83A-10(2) is not satisfied.

Question 4

Does the termination of the partnership interest give rise to CGT event C2 and if so, do section 116-20 or section 116-30 apply such that the capital proceeds are the total of the cash award payment and the options?

Answer

Yes. The cash award payment and options were provided to terminate your founding/existing equity in the business (i.e. a capital asset). The founding/existing equity you had in the business was via your interest holding in a subsidiary of the Group. You terminated this interest and received options plus a cash award payment.

The total of the cash award payment and options you received are capital proceeds for the purposes of section 116-20. The relevant CGT event is CGT event C2 for Cancellation, surrender and similar endings (section 104-25).

Conclusion

The cash award payment and options were provided to you because you had founding equity in the business and not because of your employment relationship with the business. You fulfilled the requirements to receive the cash award payment by agreeing to terminated earlier agreements and receive options plus a cash award payment replicating your interest in the business.

There is a direct link between your existing equity, the receipt of the cash award payment and options, and the termination of your interest in the business. We consider you that your interest in the business is independent of any employment and is capital in nature (FCT v McArdle 89 ATC 4051; Sent v FCT (2012) 87 ATR 223).

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

XX 20XX

Relevant facts and circumstances

You are a resident of Australia.

You are the co-founder of a business (the business).

The business is operated by an Australian company which is ultimately owned by an overseas group (the Group).

You hold an interest in the business via a subsidiary of the Group.

The Group wanted to acquire your interest and replace it with shares in the Group.

The Group offered you to participate in a new compensation package in order to:

•           Compensate for the reduction in value of the Existing compensation package by "X Instruments";

•           Create additional incentives more closely linked to the regional performance and value creation by "Incentive Instruments".

•           Provide for additional liquidity events.

The Existing compensation package consisted of:

•           'Existing Equity' being your indirect participation in the Group on the basis of earlier agreements; and

•           'Existing ESOP Options' being a stock option agreement relating to stock option in the Group under the share incentive plan.

Your Existing compensation package consisted only of 'Existing Equity' and you did not have 'Existing ESOP Options' in the Group's share incentive plan.

The new cash-based plan included X cash awards that replicated the vesting of your founding equity and Incentive cash awards that vested over a number of years.

During 20XX income year, you received correspondence from the Group stating that they intended to proceed with the exchange for your founding interest in the business for the Group's shares.

During 20XX you signed termination agreements and a call option agreement. The combined effect of these agreements resulted in the termination of your interest in the business and gave rise to payments under the X cash awards and the issue of options in the Group.

During the 20XX income year you received both X cash awards and Incentive cash awards.

Pay-as-you-go withholding was withheld from the X cash awards payment and Incentive cash awards payment (the latter payment you accept as being in relation to your employment).

You did not receive an ESS statement in respect of the Group's options.

You stopped being an employee of the Australian company during the 20XX income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 15-2

Income Tax Assessment Act 1997 Section 83A

Income Tax Assessment Act 1997 Section 104-25

Income Tax Assessment Act 1997 Section 116-20