Edited version of private advice

Authorisation Number: 1052058215842

Date of advice: 18 November 2022

Ruling

Subject: Employee share schemes

Question 1

Is the discount on the share options granted to the taxpayer by their former employer under its employee share scheme included in their assessable income in the income year when they acquired the options on 20XX under Subdivision 83A-B of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Is the discount on the share options granted to the taxpayer by their former employer under its employee share scheme included in their assessable income in the income year when a deferred taxing point occurs under Subdivision 83A-C of the ITAA 1997?

Answer

No.

This ruling applies for the following period:

Income year ended 30 June 20XX

The scheme commences on

20XX

Relevant facts and circumstances

The taxpayer was employed by Z Pty Ltd (the former employer).

The former employer operated an Employee Share Scheme under Division 83A of the ITAA 1997.

In 20XX, the taxpayer was granted XXXX share options by their former employer at a total discount of $XXXX.

In 20XX, the taxpayer exercised all the share options and acquired shares in their former employer.

The taxpayer was subject to share trading restrictions under the terms of their employment and their former employer's Securities Trading Policy, as well as under the insider trading provisions of the Corporations Act 2001.

In 20XX, the taxpayer was granted a clearance to trade the shares by their former employer under its Securities Trading Policy.

The share options were granted to the taxpayer pursuant to a provision in the Plan Rules for the former employer's Equity Incentive Plan which authorises the awards that may be made under the Plan.

The taxpayer left employment with their former employer on 20XX.

Trading in the shares of the former employer recommenced on 20XX: the closing price on this day was $XXXX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 83A-10

Income Tax Assessment Act 1997 section 83A-15

Income Tax Assessment Act 1997 section 83A-20

Income Tax Assessment Act 1997 section 83A-25

Income Tax Assessment Act 1997 section 83A-30

Income Tax Assessment Act 1997 section 83A-100

Income Tax Assessment Act 1997 section 83A-105

Reasons for decision

Question 1

Summary

The discount on the share options granted to the taxpayer by their former employer under its employee share scheme is included in their assessable income in the income year when they acquired the options on 20XX, under a taxed-up front scheme pursuant to Subdivision 83A-B of the ITAA 1997.

Question 2

Summary

The discount on the share options granted to the taxpayer by their former employer under its employee share scheme is not included in their assessable income in the income year when a deferred taxing point occurs under Subdivision 83A-C of the ITAA 1997.

Detailed reasoning

Division 83A

Division 83A of the ITAA 1997 provides for the taxation of ESS interests (shares, stapled securities and rights to acquire shares and stapled securities) acquired under an employee share scheme at a discount.

The discount given in relation to an ESS interest acquired under an employee share scheme is included in an employee's assessable income in the income year in which the interest is acquired under Subdivision 83A-B of the ITAA 1997 unless Subdivision 83A-C of the ITAA 1997 applies. If Subdivision 83A-C of the ITAA 1997 applies to the ESS interest, the employee will include an amount in the income year in which the ESS deferred taxing point for the ESS interest occurs.

Pursuant to section 83A-10 of the ITAA 1997, an ESS interest in a company is a beneficial interest in

•         a share in the company; or

•         a right to acquire a beneficial interest in a share in the company.

Under section 83A-10 of the ITAA 1997, an employee share scheme is a scheme under which ESS interests in a company are provided to employees, or associates of employees (including past or prospective employees) of:

•         the company; or

•         subsidiaries of the company;

in relation to the employees' employment.

Subdivision 83A-B

Subdivision 83A-B of the ITAA 1997 provides for the immediate inclusion of the discount received on ESS interests in assessable income, under a taxed-upfront scheme.

Section 83A-15 of the ITAA 1997 states that "Generally, a discount you receive on shares, rights or stapled securities you acquire under an employee share scheme is included in your assessable income when you acquire the beneficial interest in those shares, rights or securities."

Section 83A-20 of the ITAA 1997 states that Subdivision 83A-B applies to an ESS interest if you acquire the interest under an employee share scheme at a discount.

However, Note 1 to the section states that this Subdivision does not apply if Subdivision 83A-C applies: see section 83A-105.

Under section 83A-25 of the ITAA 1997, your assessable income for the income year in which you acquire the ESS interest includes the discount given in relation to the interest.

Section 83A-30 of the ITAA 1997 provides that for the purposes of the ITAA 1997 (other than Division 83-A), the ESS interest is taken to have been acquired for its market value (rather than its discounted value).

Subdivision 83A-C

Subdivision 83A-C of the ITAA 1997 provides for the deferred inclusion of the discount received on an ESS interest in assessable income, under a tax-deferred scheme.

Under section 83A-105, deferred taxation applies, and upfront taxation does not apply, to an ESS interest if all of the following requirements are satisfied (as applicable):

1.    Upfront taxation under Subdivision 83A-B would otherwise apply to the ESS interest.

2.    After applying the market value test in section 83A-315, there is still a discount in relation to the interest.

3.    The start-up concession in section 83A-33 does not reduce the taxpayer's assessable income for the interest.

4.    The further conditions in subsections 83A-45(1), (2), (3) and (6) must be met - these conditions relate to employment, ordinary shares, share trading and investment companies, and a 10% limit on shareholding and voting rights.

5.    Where the ESS interest is a beneficial interest in a right, the taxpayer and the employee share scheme pass the test in either paragraph 83A-105(3)(b) or subsection 83A-105(6):

•         Paragraph 83A-105(3)(b) imposes a real risk of forfeiture test for rights (a restriction on share trading does not represent a real risk of forfeiture, see ATO Interpretive Decision 2010/61 Employee share scheme: real risk of forfeiture - minimum term of employment and good leaver provisions);

•         Alternatively, subsection 83A-105(6) provides a test that, at the time the employee acquired their beneficial interest in the rights, the employee share scheme must have genuinely restricted them from immediately disposing of the rights. The scheme's governing rules must also expressly state that Subdivision 83A-C applies to the scheme, subject to the requirements of "this Act".

•         Taxation Determination TD 2022/4 Income tax: when are you genuinely restricted from immediately disposing of an interest provided under an employee share scheme, states, with reference to price-sensitive information:

26. The scheme's genuine disposal restrictions may prevent you from disposing of your ESS interest when you possess price-sensitive information. Such a restriction will usually exist together with a company's other documented rules (for example, an internal share trading policy) which prevent or restrict the company's employees from disposing of their interests in the company. To be a genuine disposal restriction you must:

o   Have, or be able to obtain, objective evidence that reasonably shows how the information you held prevented you from immediately disposing of your ESS interest, and

o   Show that you held that information at all times when you were otherwise able to dispose of your interest.

27. Your position in a company is not evidence that you possessed price-sensitive information at a particular time. You must show you actually possessed such information. You can show this with contemporaneous records or other evidence about the information, why it was price-sensitive, the date from which you held it, and the period it was price-sensitive.

•         The Explanatory Memorandum to the Tax Laws Amendment (2009 Budget Measures No. 2) Bill 2009, which introduced Division 83A provides the following guidance on the requirement that the governing rules of the scheme must state that deferred taxation applies to the scheme (the relevant provision was moved to subsection 83A-105(6) in the 2015 amendment):

Governing rules of the scheme must state that deferred taxation applies to the scheme

1.180 For tax to be deferred under the 'salary sacrifice case', the governing rules of the scheme must expressly state that the deferred taxation arrangement applies to the taxation of the scheme. [Schedule 1, item 1, subparagraph 83A-105(4)(b)(iii)]

1.181 This requirement is to clearly differentiate the scheme from similar salary sacrifice schemes where the intent is not to be subject to the deferred taxation arrangements.

1.182 A statement in the document offering an employee the opportunity to participate in the employee share scheme would be sufficient to fulfil this requirement.

Example 1.22: Example of a sentence that could be included in the offer document

'This scheme is a scheme to which Subdivision 83A-C of the Income Tax Assessment Act 1997 applies (subject to the conditions in that Act).'

The taxpayer's circumstances

Subdivision 83A-B

The share options that the taxpayer acquired in their former employer in 20XX are rights to acquire a beneficial interest in a share in his former employer and are therefore ESS interests.

The scheme under which ESS interests in the former employer are provided to employees or, or associates of employees of the company in relation to the employees' employment is an employee share scheme.

The ESS interests were also acquired under the employee share scheme at a discount.

On this basis, Subdivision 83A-B applies to the ESS interests, unless Subdivision 83A-C applies.

The taxpayer's assessable income for the income year ended 20XX, in which they acquire the ESS interests then includes the discount given in relation to the interest, unless Subdivision 83A-C applies.

For the purposes of the ITAA 1997 (other than Division 83-A), the ESS interests are taken to have been acquired for their market value.

Subdivision 83A-C

In determining whether deferred taxation applies under Subdivision 83A-C, and upfront taxation does not apply, to the taxpayer's ESS interest under section 83A-105, we consider that:

1.    Upfront taxation under Subdivision 83A-B will otherwise apply to the ESS interest, as stated above.

2.    After applying the market value test in section 83A-315, there is still a discount in relation to the interest.

3.    The start-up concession in section 83A-33 does not reduce the taxpayer's assessable income for the interest.

4.    The further conditions in subsections 83A-45(1), (2), (3) and (6) are all met - these conditions relate to employment, ordinary shares, share trading and investment companies, and a 10% limit on shareholding and voting rights.

5.    As the ESS interest is a beneficial interest in a right, the employee share scheme and the taxpayer must pass the test in either paragraph 83A-105(3)(b) or subsection 83A-105(6):

•         The restrictions on share trading applying to the taxpayer do not represent a real risk of forfeiture, so the real risk of forfeiture test is not satisfied under paragraph 83A-105(3)(b);

•         In terms of the alternative test in subsection 83A-105(6), we accept that at the time the taxpayer acquired the beneficial interest in the rights, the employee share scheme genuinely restricted them from immediately disposing of the rights, as per the Securities Trading Policy and the Rules of the Employee Share Scheme. In addition, the further information provided meets the specific requirements for price-sensitive information set out in Taxation Determination TD 2022/4.

•         However, the second part of the alternative test in subsection 83A-105(6) also requires that the scheme's governing rules must expressly state that Subdivision 83A-C applies to the scheme. Clause 3.7 of the Plan Rules for the former employer's Equity Incentive Plan does not meet this requirement. It instead refers to a taxed upfront scheme under Subdivision 83A-B (rather than a deferred tax scheme under Subdivision 83A-C). The required statement would have to have been referenced in whichever of the Clauses within Clause 3 that authorised the grant in this instance. None of the other Clauses within Clause 3 reference Division 83A of the ITAA 1997.

As both parts of the alternative test in subsection 83A-105(6) are not satisfied, the taxpayer does not meet all the requirements for deferred taxation under Subdivision 83A-C, as provided under section 83A-105.

For this reason, the discount on the share options granted to the taxpayer by the former employer under its employee share scheme is included in their assessable income in the 20XX income year when they acquired the options on 20XX, under a taxed-up front scheme pursuant to Subdivision 83A-B of the ITAA 1997.