Edited version of private advice

Authorisation Number: 1052163042517

Date of advice: 8 September 2023

Ruling

Subject:Employee share schemes - reporting obligations

Question

Will a company (Company), in relation to the Relevant Options, have an obligation to provide the Commissioner and Participants with amended Employee Share Scheme (ESS) statements under section 392-10 of Schedule 1 to the Taxation Administration Act 1953 (TAA)as a result of the share sale agreement?

Answer

No

This ruling applies for the following periods:

A number of income years

The scheme commenced on:

An income year

Relevant facts and circumstances

The Company

The Company is an Australian resident private company.

The Employee Option Plan

The Company established an employee option plan (Plan) which is operated in accordance with the Company's employee option plan rules (Rules).

The Plan is administered by the board of directors of the Company, which has the absolute discretion to offer options pursuant to the Plan (Options) to employees, contractors or non-executive directors of the Company (Participants).

The operation of the Plan is governed by the Rules and an offer letter that accompanies each grant of Option (Offer Letter).

Upon accepting the Offer Letter, each Participant must agree to be bound by the stipulated terms of each Offer Letter.

Each Offer Letter sets out, inter alia, the number of Options, vesting conditions, exercise price, exercise conditions and expiry date which applies to the Options granted to each Participant.

Each Option is granted to each Participant for no consideration and each Option entitles each Participant with a right to be allocated a fully paid ordinary share in the Company.

All Options are subject to the disposal restrictions and the 'minimum holding period' requirements as defined in the Rules.

The Rules state that the 'minimum holding period' means the period specified in subsection 83A-45(5) of the Income Tax Assessment Act 1997 (ITAA 1997).

Apart from subsection 83A-45(4) of the ITAA 1997, all Options granted under the Plan satisfied the requirements to allow the amount to be included in the Participants' assessable income to be reduced in accordance with section 83A-33.

Certain Options were granted to relevant Participants on different dates in accordance with the Rules (Relevant Options).

The Company provided statements for the Relevant Options in accordance with section 392-5 of Schedule 1 to the TAA.

The Transaction

The Company signed a share sale agreement with a purchaser (Purchaser) to acquire 100% of the Company's shares (Transaction).

The Transaction was completed when all the Options were cancelled in exchange for a cancellation payment and all the shares in the Company were sold to the Purchaser.

The Transaction occurred within 3 years of the Relevant Options having been granted.

Relevant legislative provisions

Division 392 of Schedule 1 to the TAA

Section 392-5 of Schedule 1 to the TAA

Subsection 392-5(1) of Schedule 1 to the TAA

Section 392-10 of Schedule 1 to the TAA

Subdivision 83A-B of the ITAA 1997

Subsection 83A-33(1) of the ITAA 1997

Subsection 83A-45(4) of the ITAA 1997

Subsection 83A-45(5) of the ITAA 1997

Reasons for decision

All legislative references are to Schedule 1 to the Taxation Administration Act 1953 unless otherwise specified.

ESS reporting requirements

Subsection 392-5(1) imposes reporting obligations on an entity (the provider) that provides ESS interests to an individual, where Subdivision 83A-B of the ITAA 1997 applies to the ESS interests.

Under the Rules, the Company provided Relevant Options to Participants at a discount which were taxed under Subdivision 83A-B of the ITAA 1997 and as such, the Company had a reporting obligation under section 392-5.

Participants were entitled to reduce the amount of the discount included in their assessable income as all of the requirements in subsection 83A-33(1) of the ITAA 1997 were satisfied.

Accordingly, the Company provided statements for the Relevant Options in accordance with section 392-5 which specified details of the acquisition of options acquired under the start-up concession.

Amendments to ESS statements

If a provider becomes aware of any material change to or omission from any information given to the Commissioner or to the individual under Division 392, then the provider is required to advise the Commissioner or the individual, as applicable, of the change or provide the omitted information to the Commissioner or to the individual, as applicable, under section 392-10.

In this case, as part of the Transaction, the Options were cancelled in exchange for a payment and the Transaction was completed when all the shares in the Company were acquired by the Purchaser.

As such, it is necessary to determine whether this constitutes a material change to the statements provided under section 392-5 resulting in the Company having an obligation under section 392-10 to make an amendment to the section 392-5 statements previously provided.

Minimum holding period

Amongst the conditions that must be met for section 83A-33 of the ITAA 1997 to operate, are those contained in section 83A-45. Apart from subsection 83A-45(4) of the ITAA 1997, all Relevant Options granted under the Plan satisfied the requirements to allow the amount to be included in assessable income to be reduced in accordance with subsection 83A-33(1).

The minimum holding period provisions are detailed in subsections 83A-45(4) and (5) of the ITAA 1997:

Minimum holding period

(4) This subsection applies to an ESS interest you acquire under an employee share scheme if, at all times during the interest's minimum holding period, the scheme is operated so that every acquirer of an ESS interest (the scheme interest) under the scheme is not permitted to dispose of:

(a)  the scheme interest; or

(b)                                         a beneficial interest in a share acquired as a result of the scheme interest;

during the scheme interest's minimum holding period.

(5) 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 that 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; and

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

Given that all the membership interests in the Company were acquired by the Purchaser as part the Transaction (i.e. within 3 years after the Relevant Options having been granted), the remaining consideration is whether the operators of the scheme intended for subsection 83A-45(4) of the ITAA 1997 to apply to the ESS interests during the three years after the acquisition of the interests.

The operators of the scheme would fail the test if they had either:

•         allowed participants to dispose of their interests prior to the end of their minimum holding period, or

•         there was objective evidence that the scheme was not operated to prevent the participants from doing so.

Accordingly, the Commission will consider whether to exercise his discretion under subsection 83A-45(5) of the ITAA 1997 to allow the minimum holding period for the Relevant Options granted under the Plan to be reduced.

As the Rules specifies a minimum holding period in accordance with subsection 83A-45(5) of the ITAA 1997, and there is no evidence that any such disposal has been allowed at an earlier time, there is objective evidence that the scheme operated to prevent the Participants from disposing of their interests before the end of the minimum holding period.

Having considered the current facts and circumstances, the Commissioner will exercise his discretion under paragraph 83A-45(5)(a) of the ITAA 1997 to allow the minimum holding period for the Relevant Options that qualify for concessional treatment under section 83A-33 to be reduced.

Conclusion

All Relevant Options granted under the Plan satisfied the requirements to allow the amount to be included in assessable income to be reduced in accordance with subsection 83A-33(1) of the ITAA 1997.

As such, the Commissioner is satisfied that there have been no material changes to the statements provided under section 392-5 and the Company does not have an obligation under section 392-10 to make an amendment to the section 392-5 statements previously provided.