Edited version of private advice

Authorisation Number: 1052232310542

Date of advice: 15 March 2024

Ruling

Subject: Employee share scheme start-up - minimum holding period

Question

Will the Commissioner exercise his discretion to allow the minimum holding periodfor ESS interests (Options)to be reducedunder paragraph 83A-45(5)(a) of the Income Tax Assessment Act 1997 for the purposes of determining the company's reporting obligations under Division 392 of Schedule 1 to the Taxation Administration Act 1953?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

A company (Coy A) was incorporated in Australia.

Coy A established an Employee Incentive Options Plan (the Plan).

The Plan is governed by the Plan Rules.

Coy A granted options to its employees under the Plan that were intended to qualify for the start-up concessions under Subdivision 83A-B of the Income Tax Assessment Act 1997.

Coy A has not been listed on a stock exchange nor has any subsidiary of Coy A, any holding company of Coy A or any subsidiary of a holding company of Coy A been listed on a stock exchange.

Coy A has no subsidiary, holding company, or subsidiary of a holding company of Coy A that has been incorporated for more than XX years.

Coy A had an aggregated group turnover of less than $XX million in the most recent income year before the income year in which options were acquired.

The amount that must be paid to exercise each Option is greater than the market value of an ordinary share in Coy A when the options were granted.

Coy A was an Australian resident company when the options were acquired by its employees.

Options under the Plan were only issued to Coy A's employees.

All options under the Plan relate to ordinary shares in Coy A.

Coy A does not have a predominant business of share trading or investment in shares.

No employee has been issued with options individually that is equivalent to 10% or more shareholding and voting power.

Since establishment of the Plan, in accordance with the requirements in subsections 83A-45(4) and (5), the Plan has been operated so that Participants under the Plan were not permitted to dispose of:

a)    the ESS Interest they acquired under the Plan; or

b)    a beneficial interest in a share acquired as a result of the ESS Interest

within 3 years from the date of acquisition of the ESS interest.

The Plan Rules provides that the Options are non-transferrable other than in 'Special Circumstances' with consent of the Board. This limitation is not limited to 3 years; it applies to the life of the ESS Interest.

Special Circumstances is defined in the Plan Rules.

The Plan Rules allows for disposal restrictions to apply to Shares acquired upon exercise of the Options. In this regard the Offer Letter provides that 'the Shares issued on exercise of the Awards will be subject to the following Restriction Periods:

(i)    3 years from the date of issue of the Award; or

(ii)   where you cease employment with the Company,

unless such disposal would meet the requirements in section 83A-130 of the Tax Act.'

When the Options were granted, there was no indication that a takeover or merger of Coy A would occur.

No interests were allocated to employees from the date negotiations commenced in respect to the Proposed Transaction.

Proposed Transaction

Coy A is considering a merger proposal (Proposed Transaction) with an Australian resident company (Coy B).

The Proposed Transaction will involve the acquisition of 100% of Coy A's issued capital by Coy B who will issue ordinary shares as consideration for the acquisition of the shares in Coy A.

As provided in the Plan Rules, it is proposed that the Board of Coy A will allow employees holding Options to exercise their Options so that they can then participate in the transaction on the same terms as other shareholders of Coy A.

Lead up to Proposed Transaction

Coy A and Coy B are not related entities.

A function of the Board of Coy A is to seek out non-organic growth opportunities.

As a part of its business model, Coy A seeks to partner with organisations that have skills and capabilities that can assist its business in new offerings, scale or geographical coverage.

While seeking avenues to expand, Coy A was made aware of Coy B.

From discussions and partnering models worked through, it became evident that there was a strategic mutual benefit for both companies to more formally combine capabilities and assets.

Prior to discussions commencing with Coy B, merger was never a consideration for Coy A.

Merger negotiations commenced during 20XX.

The companies are still conducting further due diligence activities.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 83A-33

Income Tax Assessment Act 1997 subsection 83A-33(1)

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

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

Income Tax Assessment Act 1997 subparagraphs 83A-45(5)(a)(i) and (ii)

Income Tax Assessment Act 1997 section 83A-130

Reasons for decision

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

To qualify for the ESS start-up concessions under section 83A-33, the ESS interest must meet primary conditions in subsections 83A-33(2) to (6) and further conditions in section 83A-45.

The ESS interests (Options) acquired under the Employee Incentive Options Plan (the Plan) of the company (Coy A) meet all the primary conditions in subsections 83A-33 (2) to (6). Currently, the Options also meet the further conditions in section 83A-45.

One of the further conditions is the minimum holding periodcondition detailed in subsections 83A-45(4) and 83A-45(5). If the proposed transaction takes place, this condition will not be met unless the Commissioner allows a shorter holding period.

83A-45(4)

The minimum holding periodcondition is satisfied if 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.

83A-45(5)

An ESS interest's minimum holding periodis 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.

The operators of the scheme would 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.

Objectively, the Commissioner would not accept that the scheme was operated to prevent the participants from disposing of their interests before the end of the minimum holding period where interests were allocated after the time that it became clear that a merger or takeover was imminent.

Consideration of the Coy A's circumstances

Coy A granted Options to employees under the Plan that were intended to qualify for the start-up concessions under Subdivision 83A-B.

Coy A is considering a merger proposal with Coy B (Proposed Transaction).

Under the merger, it is proposed that the Options will be exercised and converted into ordinary shares just before the Proposed Transaction and all membership interests in Coy A will be acquired by Coy B.

The Proposed Transaction will therefore result in the holders of Options disposing of their ESS interests within 3 years of acquiring them and ceasing to meet the minimum holding period condition unless the Commissioner allows an earlier ending.

When the Options were granted, there was no indication that a merger would occur.

No Options have been allocated to employees from the date negotiations commenced in respect to the Proposed Transaction.

There will not be any disposal or transfer of Options acquired under the Plan prior to the date of the Proposed Transaction and there has not been, and won't be, any disposal or transfer of any shares acquired on exercise of Options acquired under the Plan prior to the date of the Proposed Transaction.

There is no evidence to suggest that the operators of the Plan did not intend for every option holder under the Plan to be restricted from disposing of their Options for the minimum holding period.

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 to end at the earlier date of when the shares are disposed of under the Proposed Transaction.