Edited version of private advice

Authorisation Number: 1052115140033

Date of advice: 18 May 2023

Ruling

Subject: Employee share scheme - start-up concession

Question 1

Does the start-up concession apply to the Options granted to the Trust?

Answer

Yes.

If an associate of yours acquires Employee Share Scheme (ESS) interests which are provided in relation to your employment or services, the ESS rules require you (rather than your associate) to include the discount in your assessable income. Under the start-up concession, you can reduce the taxable discount income relating to your ESS interests to nil.

In this case, the several conditions to be eligible to apply the start-up concession have been met. The ESS interests were acquired after 30 June 20XX, Company Y was a start-up company (not listed on a stock exchange, aggregated turnover less than $XX million and incorporated less than XX years), the exercise price was at least equal to the market value of an ordinary share, the employer is an Australian tax resident, you held less than 10% interest in shareholding and voting rights and the options were issued with a three-year minimum holding period. Therefore, Individual A is not required to include an amount in their 20XX income tax return in relation to the acquisition of the Options.

Question 2

If either the Options are disposed of or the Options are exercised and the resulting shares are disposed of, is the Trust the relevant taxpayer to be assessed on any capital gain made on disposals under Part 3-1 of the ITAA 1997?

Answer

Yes.

When the options or shares are disposed of capital gains tax (CGT) event A1 happens. The beneficial owner, the Trust, of the CGT asset will be liable to determine the capital gain or loss from the event. Further information on the CGT treatment of an ESS interest eligible for the start-up concession can be found on our website, ato.gov.au, search quick code 47654.

This ruling applies for the following periods:

1 July 20XX to 30 June 20XX

The scheme commenced on:

XX November 20XX

Relevant facts and circumstances

The Trust is a discretionary trust with Individual A and their family as beneficiaries.

Individual A was appointed a founding director of Company X (a technology start-up company) when it was incorporated on XX March 20XX.

The Trust was issued with X% of the shares in Company X on XX March 20XX.

On X April 20XX the Trust's shares in Company X were exchanged for A & B shares in Company Y which became the overseas parent company of Company X which became its 100% subsidiary.

Company Y was incorporated on XX September 20XX with two classes of shares namely A and B Class shares with the following share rights:

•         A Class and B Class shares had equal voting rights at shareholder meetings;

•         A Class and B Class shares had equal rights to dividends; and

•         on liquidation A Class shares will receive a distribution of share capital and then the balance of share capital is divided equally between the A and B Class shares.

The A Class shares constitute 'ordinary shares' for the purposes of section 83A-45(2) of the ITAA 1997.

On XX June 20XX:

•         the companies in the corporate group comprised only Company Y and Company X;

•         none of the companies in the corporate group were listed on a stock exchange;

•         none of the companies in the corporate group were incorporated for more than 10 years; and

•         the aggregate annual turnover of Company Y was less than $XX million.

On XX November 20XX the Trust was offered and granted the employee share options in Company Y (the Options) for nil consideration under an Offer Letter and an Option Plan dated XX November 20XX in respect of Individual A's work as a director of Company X.

Just after the grant of the Options, the Trust held less than 10% of the shares and voting power in Company Y.

The Offer letter provides Company X sought a private binding ruling in relation to the qualification of Class A Shares in Company Y for tax concessions under the ESS rules being eligible for the start-up tax concession.

Individual A ceased to be a director of Company X in November 20XX and the Trust was permitted to keep its Options.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 83A-33

Income Tax Assessment Act 1997 section 83A-45

Income Tax Assessment Act 1997 section 83A-305

Income Tax Assessment Act 1997 section 104-10