Edited version of private advice

Authorisation Number: 1052228576601

Date of advice: 4 March 2024

Ruling

Subject: Employee share scheme - deferred taxing point

Question

Did the deferred taxing point for your vested options (employee share scheme interests) occur on DD Month 20XX under section 83A-120 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No. There were no genuine restrictions preventing you from disposing of the shares, therefore the deferred taxing point is DD Month 20XX being the date when the options were exercised.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

30 June 20XX

Relevant facts and circumstances

Background

In Month 20XX, whilst employed by Company A, you accepted an offer of Options under the Company Employee Incentive Plan 20XX.

Once vested you could choose to exercise your Options by purchasing Company A stock at the exercise price.

Your Options were released in tranches subject to continued service and performance-based conditions:

•         Tranche 1 vested DD Month 20XX

•         Tranche 2 vested DD Month 20XX

•         Tranche 3 vested DD Month 20XX

When accepting the offer, you were deemed to agree to be bound by the Employee Incentive Plan Rules including the general provision to abide by the terms of Company A's Securities Trading Policy (Trading Policy).

Section 3.2 of the Trading Policy imposed restrictions stating employees must not deal in Company A securities during specified blackout periods.

The Trading Policy indicated that non-compliance would be regarded by the Company as serious and may lead to penalties for breach of insider trading laws and investigation by the Company which may lead to disciplinary action including forfeiture of securities and/or suspension or termination of employment.

However, Section 5 of the Trading Policy discussed excluded dealings and specifically stated that Section 3.2 did not apply to: "the disposal of Company securities through the acceptance of a takeover offer, scheme of arrangement or equal access buy-back".

Scheme of Arrangement

On DD Month 20XX, Company A and Company B announced they had entered into a Scheme Implementation Deed. Under that deed, Company A agreed to propose to shareholders the scheme of arrangement under Part 5.1 of the Corporations Act 2001, pursuant to which Company B would acquire all of the ordinary shares in Company A in exchange for Company B shares or interests.

On DD Month 20XX, an explanatory statement providing information about the Scheme (Scheme Booklet) was registered with the Australian Securities and Investments Commission (ASIC).

The Scheme Booklet was distributed to Company A shareholders who were advised to carefully read it in its entirety before making any decisions in relation to the Scheme; and were encouraged to seek independent financial, legal, accounting, taxation and/or other professional advice before making any decisions in relation to their Company A shares.

The Scheme Booklet provided an overview of the Scheme Consideration:

"If the Scheme is implemented Scheme Shareholders (other than Ineligible Foreign Shareholders) will receive the Scheme Consideration comprising 0.375 New Company B Shares or 0.375 New Company B CDIs for each Scheme Share held as at the Record Date."

Shareholders were advised that if they did not make a Share Election or CDI Election, they would receive the default consideration. The Scheme Booklet also advised shareholders that they could sell their Company A Shares at any time prior to the suspension of Company A Shares from trading:

"If you do not wish to hold your Company A Shares and participate in the Scheme, you may offer to sell your Company A Shares on ASX at any time prior to Thursday, DD Month 20XX."

Section 4.11 of the Scheme Booklet specifically addressed treatment of Company A's existing employee incentive plans upon implementation of the Scheme. In relation to Options it stated:

"Any Company A Options that are not exercised as of the Record Date will be forfeited for no consideration. The Board may provide that all vested Company A Options will be automatically exercised prior to the Record Date."

A resolution in favour of the scheme of arrangement was passed by Company A shareholders on DD Month 20XX and the scheme of arrangement was approved by the Supreme Court on DD Month 20XX.

Key dates for implementation of the Scheme were as follows:

•        DD Month 20XXElection Date - latest date by which CDI Election Forms and Share Election Forms must be received by the Company A Share Registry, only if holders wished to make a Share Election or a CDI Election rather than receive their default Scheme Consideration

•        DD Month 20XXCompany A Shares suspended from trading on ASX

•        DD Month 20XXNew Company B CDIs commenced trading on ASX

•        DD Month 20XXRecord Date - determination of entitlement of Scheme Shareholders to receive the Scheme Consideration (7pm AEDT)

•         DD Month 20XX Implementation Date - all Scheme Shareholders provided with the Scheme Consideration to which they are entitled.

Your vested Tranche 2 and Tranche 3 options were exercised on DD Month 20XX.

Company A shares were suspended from trading on the ASX from the close of trading on DD Month 20XX.

Company B acquired 100% of the shares in Company A on the Implementation Date, DD Month 20XX.

Your Company A shares were converted to Company B shares on DD Month 20XX.

Company A was removed from the official list of the ASX on DD Month 20XX.

Your contentions

You were unaware your vested options were exercised on DD Month 20XX, as you did not expect there to be any activity or be allowed to take any action regarding your vested options during Company A's blackout period.

You cite section 3.2 of the Trading Policy which states employees must not have any dealings in Company securities during the blackout period from close of trading on the ASX on 31 December each year, until commencement of trading on the day following announcement to ASX of the Company's half-year results.

On this basis, you state there were genuine disposal restrictions on the vested options on DD Month 20XX.

Further, you cite the Company B Insider Trading Policy and Guidelines, which you understand are applicable to you following the Scheme's implementation. Associated documents show that Company B's prescribed blackout period covered the dates between DD Month 20XX to DD Month 20XX, with the first day of open trading following Company B's acquisition of Company A being DD Month 20XX.

It is therefore your contention that the deferred taxing point for your Tranche 2 and Tranche 3 employee share scheme interests should be DD Month 20XX, being the earliest date of allowed disposal.

Assumptions

For the purposes of this ruling, the following assumptions have been made:

•        You did not choose to exercise your Tranche 2 and Tranche 3 options

•        Your vested options were automatically exercised as part of the scheme of arrangement.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 section 83A-120

Reasons for decision

Employee share schemes

The employee share scheme (ESS) provisions are contained in Division 83A of the ITAA 1997.

In summary, the ESS provisions recognise the dual nature of grants of shares and rights to acquire shares, defined as ESS interests, as both remuneration and investments. To this end, the ESS provisions provide a mechanism for recognising an appropriate value for remuneration purposes and an adjustment to the purchase price for investment purposes to reflect the amount treated as remuneration.

The ESS provisions achieve this outcome by:

•              determining when a taxpayer needs to include any discount received in relation to a share or right to acquire the share in their assessable income;

•              calculating the amount of this discount using the market value of the share or right to acquire the share at this date ignoring any selling restrictions or forfeiture conditions; and

•              using this date and the market value of the share or right as the acquisition date and amount paid for it for all other income tax purposes.

Deferred taxing point

Subdivision 83A-C of the ITAA 1997 provides that when certain conditions are satisfied, the discount in relation to an ESS interest is not included in the employee's assessable income in the income year they acquire the ESS interest but will be included when the deferred taxing point occurs.

The deferred taxing point for an ESS interest that is a beneficial interest in a right to acquire a share that was granted on or after 1 July 2015 will be the earliest of the times in accordance with subsections 83A-120 (4), (6) and (7) of the ITAA 1997, summarised as follows:

•              when the ESS interest has not been exercised, there is no real risk of forfeiting the ESS interest, and the scheme no longer genuinely restricts disposal of the ESS interest; or

•              the end of the 15-year period starting when the employee acquired the ESS interest; or

•              when the ESS interest is exercised and there is no real risk of forfeiting the share and the scheme no longer genuinely restricts disposal of the share.

Genuinely restricted

For the purposes of Division 83A of the ITAA 1997, the term 'genuinely restricted' is not defined and therefore takes on its ordinary meaning. The term is explained in Taxation Determination 2022/4 Income tax: when are you genuinely restricted from immediately disposing of an interest provided under an employee share scheme? (TD 2022/4) which sets out the Commissioner's view for working out when a scheme's disposal restrictions were genuine disposal restrictions and when the taxpayer would no longer be 'genuinely restricted' by the scheme for the purposes of determining the deferred taxing point.

Paragraph 21 of TD 2022/4 states in order for a genuine disposal restriction to occur, the scheme's restriction must control or limit the power or right to (voluntarily or compulsorily) sell, transfer, assign, deal with, make over or part with the ESS interest (whether legally or beneficially).

Paragraph 23 of TD 2022/4 explains that the scheme's genuine disposal restrictions may be contained in documents that you are required to comply with to participate in the scheme, such as:

•              the scheme rules

•              the offer document

•              other governing documents of the scheme

•              documented company policies, or

•              your employment contract.

As explained in paragraph 29 of TD 2022/4, you will no longer be restricted on the first date on which you have an opportunity to dispose of your ESS interest. This will be the first time you can take some action to deal with or realise your ESS interest (for example, by way of sale, transfer or gift).

Application to your circumstances

As was outlined in the Scheme Booklet, to avoid your vested Tranche 2 and Tranche 3 options being forfeited for no consideration, the Board instead deemed them to be automatically exercised on DD Month 20XX.

As per Section 5 of Company A's Securities Trading Policy, any restrictions to dealing in Company securities during blackout periods did not apply to disposal through the acceptance of a takeover offer or scheme of arrangement.

As there were no restrictions in place, the taxing point is at the time your options were exercised, DD Month 20XX.