Edited version of private advice

Authorisation Number: 1052222423816

Date of advice: 23 February 2024

Ruling

Subject: Commissioner's discretion - employee share schemes

Question

Will the Commissioner allow the minimum holding period for the ESOP interests to end at an earlier time, being the Date of Sale, pursuant to paragraph 83A-45(5)(a) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

Relevant facts and circumstances

The Company is an Australian resident private company.

The Company is not in the business of acquiring, selling or holding shares, securities or other investments and has not entered into any transactions of this nature.

Employee share scheme (ESS)

The Company established its ESS (ESOP) in 20XX to provide options (Options) to acquire ordinary shares in the Company at market value to eligible persons to provide a value-based reward to those who make key contributions to the Company's success and promote the retention of these persons.

In 20XX, options (the ESOP interests) were issued to the Individual under the ESOP Plan Rules (Plan Rules).

Terms of the ESOP

The Plan Rules restrict Participants from dealing (which includes disposal) with Options, or the shares (Shares) acquired through their exercise, acquired under the ESOP:

•         for a minimum of 3 years, or

•         such earlier time as the Commissioner allows in accordance with section 83A-45(5), or

•         until the Participant ceases their relevant employment.

The ESOP constituted an 'employee share scheme' under section 83A-10 of the ITAA 1997.

Any option or share acquired pursuant to the ESOP constituted an 'ESS interest' under Division 83A of the ITAA 1997.

Offer by the Purchaser

In 20XX, the Company engaged with a broker to gauge opportunities for an exit.

The Purchaser approached the Company in 20XX expressing interest in acquiring the Company.

After a period of due diligence, the sale of the Company, including the ESOP interests, was negotiated and contracted for sale on the Date of Sale. All membership interests were disposed of under this acquisition.

There were no other disposals or transfers of interests acquired under the ESOP by any participant within three years after their acquisition.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 section 83A-10

Income Tax Assessment Act 1997 subsection 83A-45(4)

Income Tax Assessment Act 1997 subsection 83A-45(5)

Reasons for decision

Summary

The Commissioner will allow the minimum holding period for the ESOP interests end at an earlier time, being the Date of Sale, pursuant to paragraph 83A-45(5)(a) of the ITAA1997.

Detailed reasoning

All legislative references are to the Income Tax Assessment Act 1997 unless otherwise stated.

The minimum holding period requirement is explained in subsections 83A-45(4) and (5), which state:

(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 the 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.

The Explanatory Memorandum for the Tax and Superannuation Laws Amendment (Employee Share Schemes) Bill 2015 explains the introduction of the Commissioner's discretion in subsection 83A-45(5) as follows:

1.82 This Bill makes slight improvements to the existing minimum holding period condition by allowing the Commissioner to reduce the minimum holding period in situations in which all employees are effectively required to exercise and/or dispose of their ESS interests. For example, where there is an initial public offering of the company, or the company is subject to a full trade sale and employees have agreed to a 'tag along' clause in relation to holding of minority interests. The Commissioner in applying the discretion will need to have regard to whether, when employees acquired their interest, there was a genuine intention for the interests to be held for the minimum holding period.

(emphasis added)

Application to your circumstances

All the membership interests in the Company were acquired under the acquisition, thus satisfying subparagraph 83A-45(5)(a)(ii).

In exercising his discretion, the Commissioner must also consider, under subparagraph 83A-45(5)(a)(i), whether the operators of the scheme genuinely intended for the Options to be held for the minimum holding period.

The operators of the scheme may fail the test if they had either allowed a participant to dispose of their interest prior to the end of its minimum holding period or there was objective evidence that the scheme was not operated to prevent the participants from doing so.

The Plan Rules contain the relevant clauses for disposals of a legal or beneficial interest in an Option or Share. The Plan Rules contain an overriding restriction on any disposal in the first 3 years, unless the Commissioner allows an earlier time by exercising his discretion, which reflects the minimum holding period provided for in section 83A-45. The relevant clauses in the ESOP Rules are designed to ensure the ESOP complies with the minimum holding period requirements in subsections 83A-45(4) and (5).

The Commissioner is satisfied that the ESOP Rules prevented Participants disposing of Options acquired until the earlier of the 3-year anniversary of the date the Options were granted or the day after the date they ceased to be employed by the Company. The ESOP Rules did not provide for an exemption from or non-compliance with this rule and there is no evidence to suggest that the Company (or its Board), as operators of the ESOP, did not intend for every Option Holder under the ESOP to be restricted from disposing their Options for that minimum holding period.

Further, all Options were acquired by the Participants under the ESOP prior to the Company having been approached by the Purchaser and having entered into any negotiation with the Purchaser regarding the Purchaser's acquisition of all the Company's issued capital under the Proposed Sale.

Accordingly, the Commissioner is satisfied that the requirements of subparagraphs 83A-45(5)(a)(i) and (ii) are met and will allow the minimum holding period for the ESOP interests to end at an earlier time, being the Date of Sale.