Edited version of private advice

Authorisation Number: 1052241913522

Date of advice: 17 April 2024

Ruling

Subject: Employee share scheme - reporting obligations

Question

Will SubCo have reporting obligations for a financial year under paragraph 392-5(1)(b) of Schedule 1 to the Taxation Administration Act 1953, in relation to awards granted to its Australian-resident employees under the Plan, if an ESS deferred taxing point occurs during the year?

Answer

Yes.

This ruling applies for the following periods:

1 July 20XX to 30 June 20XY

The scheme commenced:

During a particular income year

Relevant facts and circumstances

1.    SubCo is incorporated in Australia.

2.    SubCo is a subsidiary of ParentCo, a company incorporated in a foreign jurisdiction.

3.    ParentCo is not predominantly in the business of acquiring, selling or holding shares, securities or other investments (whether directly or indirectly through one or more companies, partnerships or trusts).

4.    ParentCo's capital structure consists only of Class A and Class B common stock, both of which are listed on an approved stock exchange of the foreign jurisdiction.

5.    Each Class A and Class B common stock have the same rights in relation to all distributions of earnings or assets (in the event of liquidation, dissolution, or winding-up) of ParentCo that is distributable to the common stockholders.

6.    Class A common stockholders have full and exclusive voting powers, with each holder being entitled to one vote for each Class A common stock held on all matters submitted to a stockholder vote.

7.    Class B common stockholders do not have any voting powers, except those provided by the laws of the foreign jurisdiction.

8.    The rules of the foreign stock exchange allow for the listing of non-voting common stock.

9.    ParentCo established an incentive compensation plan (the Plan).

10.  The objective of the Plan is to motivate, attract and retain participants by allowing participants (any ParentCo group employee or director) to share in the success of the ParentCo group.

11.  Under the Plan, the plan administrator may grant certain eligible participants with awards.

12.  Although the plan administrator may grant awards that include or relate to Class A common stock under the Plan rules, ParentCo intends to only grant restricted stock units (RSUs) and stock-settled stock appreciation rights (SSARs) that relate to its Class B common stock to SubCo employees.

13.  The terms and conditions of an offer of RSUs or SSARs are set out in the Plan's rules and the respective grant letter. Where there are inconsistencies between the Plan's rules and a grant letter, the terms of the Plan's rules take precedence.

14.  RSUs granted to SubCo employees under the Plan are either performance-based or time-based. Each RSU represents the right to receive one share of ParentCo's Class B common stock.

15.  The vesting of performance-based RSUs is subject to the attainment of performance goals over a performance period and continual employment throughout the period. If a participant does not remain continuously employed until the last day of the performance period, certain rules apply to determine the extent of vesting (if any).

16.  The vesting of time-based RSUs is subject to continual employment through applicable vesting dates. If a participant does not remain continuously employed through the applicable vesting date, certain rules apply to determine the extent of vesting (if any).

17.  Any RSUs that do not vest are forfeited and cancelled.

18.  An SSAR entitles a participant, upon exercise (in whole or in part), to receive an amount payable in the form of Class B common stock, determined by multiplying the appreciated value of a share (calculated as the Fair Market Value of a share on the date of exercise minus the Grant Price) by the number of shares with respect to which the SSAR is exercised.

19.  To exercise the SSAR, a participant must remain continuously employed for a certain period of time. If a participant does not remain continuously employed, certain rules apply to determine the extent to which the SSAR is exercisable.

20.  Any SSAR that do not meet the exercise conditions will expire (in part or in full) and may not be exercised.

21.  RSUs and SSARs will be granted for nil consideration.

22.  No participant will hold a beneficial interest in, or a right to acquire a beneficial interest in, more than 10% of the shares in ParentCo, nor will be able to cast, or control the casting of, more than 10% of the maximum number of votes that might be cast at a general meeting of ParentCo, after the allocation of awards under the Plan.

Relevant legislative provisions

Section 392-5 of Schedule 1 to the Taxation Administration Act 1953

Reasons for decision

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

Paragraph 392-5(1)(b) of Schedule 1 to the Taxation Administration Act 1953 (TAA) requires a provider to give a statement to the Commissioner and to the employee if ESS interests have been provided to the employee (whether during the current or a prior year) to which Subdivision 83A-C applies and the ESS deferred taxing point for the interests occurs during the year.

ESS interests are provided to employees under the Plan

An 'ESS interest', in a company, has the meaning given by subsection 83A-10(1) (subsection 995-1(1)).

Under subsection 83A-10(1), an ESS interest, in a company, is a beneficial interest in a share in the company or a right to acquire a beneficial interest in a share in the company.

Subsection 995-1(1) defines a 'share' as a share in the capital of the company, and includes stock.

RSUs and SSARs that are awarded under the Plan will provide eligible employees with the right to receive Class B common stock of ParentCo. Class B common stock confers upon its holder rights in relation to all distributions of earnings or assets (in the event of liquidation, dissolution, or winding-up) of ParentCo that is distributable to the common stockholders. Therefore, a Class B common stock is a 'share' as defined in subsection 995-1(1).

As the RSUs and SSARs provide eligible employees with a beneficial interest in a right to acquire a beneficial interest in the shares in ParentCo, they are 'ESS interests' within the meaning given under subsection 83A-10(1).

Accordingly, subparagraph 392-5(1)(b)(i) of Schedule 1 to the TAA is satisfied.

Subdivision 83A-C will apply to the RSUs and SSARs

Subsection 83A-105(1) provides that Subdivision 83A-C applies, instead of Subdivision 83A-B, to an ESS interest in a company if:

(a)  Subdivision 83A-B would, apart from section 83A-105, apply to the interest

(aa) after applying section 83A-315, there is still a discount given in relation to the interest

(ab) section 83A-33 does not reduce the amount to be included in a participant's assessable income in relation to the interest

(b)  subsections 83A-45(1), (2), (3) and (6) apply to the interest

(c)   if the interest is a beneficial interest in a share:

(i)  subsection 83A-105(2) applies to the interest

(ii) subsections 83A-105(3) or (4) applies to the interest, and

(d)  if the interest is a beneficial interest in a right to acquire a beneficial interest in a share - subsection 83A-105(3) or (6) applies to the interest.

Paragraph 83A-105(1)(c) is not relevant as the RSUs and SSARs granted under the Plan provide eligible employees with a beneficial interest in a right to acquire a beneficial interest in the shares in ParentCo.

Subdivision 83A-B would, apart from section 83A-105, apply to the RSUs and SSARs

Subdivision 83A-B applies to an ESS interest if an employee acquires the interest under an employee share scheme at a discount (subsection 83A-20(1)).

As explained earlier, the RSUs and SSARs are ESS interests.

An 'employee share scheme' is a scheme under which ESS interests in a company are provided to employees of the company, or subsidiaries of the company, in relation to their employment (subsection 83A-10(2)).

The Plan is an 'employee share scheme' under subsection 83A-10(2) as RSUs and SSARs are provided to eligible employees of SubCo, a subsidiary of ParentCo, in relation to their employment with SubCo.

As the RSUs and SSARs are provided to participants for nil consideration, they are acquired by them at a discount.

Accordingly, Subdivision 83A-B would, apart from section 83A-105, apply to the RSUs and SSARs and paragraph 83A-105(1)(a) is satisfied.

There will still be a discount given in relation to the RSUs and SSARs after applying section 83A-315

Section 83A-315 provides that, where applicable, the amount specified in the regulations is to be used as the market value for an ESS interest.

As the RSUs and SSARs are provided to participants for nil consideration, there is still a discount given after applying section 83A-315 and paragraph 83A-105(1)(aa) is satisfied.

Section 83A-33 will not reduce the amount to be included in a participant's assessable income in relation to the RSUs and SSARs

Subsection 83A-33(1) sets out the conditions that need to be satisfied before section 83A-33 can apply - one condition is subsection 83A-33(2) which applies to an ESS interest in a company if no equity interests of the company are listed for quotation in the official list of any approved stock exchange.

As ParentCo is a public company with its Class A and Class B common stock listed on an approved stock exchange (as listed at Schedule 3 to the Income Tax Assessment (1997 Act) Regulations 2021), subsection 83A-33(2) will not apply.

Accordingly, section 83A-33 does not apply to reduce the amount to be included in a participant's assessable income in relation to the RSUs and SSARs and paragraph 83A-105(1)(ab) is satisfied.

Subsection 83A-45(1) will apply to the RSUs and SSARs

Subsection 83A-45(1) applies to an ESS interest in a company if, when an employee acquires the interest, the employee is employed by the company or a subsidiary of the company.

As RSUs and SSARs are granted under the Plan to eligible employees of SubCo, a subsidiary of ParentCo, subsection 83A-45(1) will apply to the RSUs and SSARs.

Subsection 83A-45(2) will apply to the RSUs and SSARs

Subsection 83A-45(2) applies to an ESS interest acquired under an employee share scheme if, when the employee acquires the interest, all the ESS interests available for acquisition under the scheme relate to ordinary shares.

The term 'ordinary share' is not defined in the ITAA 1997, the Income Tax Assessment Act 1936 or the Corporations Act 2001. Therefore, in the context of Division 83A, 'ordinary share' takes its ordinary meaning.

In Norman v Norman (1990) 19 NSWLR 314, McLelland J stated at 316 that an ordinary share has the meaning in ordinary usage and that, in ordinary usage, ordinary shares mean shares other than preference shares. His Honour noted that different contexts may yield different interpretations. The decision should therefore not be read as proposing an inflexible dichotomy between ordinary and preference shares.

Whether or not a share is an ordinary share must ultimately be determined by reference to the rights which attach to it. If the rights attaching to a share are insufficient to achieve the purpose of subsection 83A-45(2) and bear little resemblance to a share as traditionally conceived (Sydney Futures Exchange Ltd v Australian Stock Exchange Ltd & Anor [1995] FCA 86, National Mutual Life Association of Australasia Limited v Commissioner of Taxation [2008] FCA 1871 at [46]), it is less likely to meet the meaning of 'ordinary share'.

Under the Plan's rules, the plan administrator may grant awards that include or relate to ParentCo's Class A and Class B common stock.

It is considered that both Class A and Class B common stock are ordinary shares. Consequently, all ESS interests available for acquisition under the scheme relate to ordinary shares and subsection 83A-45(2) will apply to the RSUs and SSARs.

Subsection 83A-45(3) will apply to the RSUs and SSARs

Subsection 83A-45(3) applies to an ESS interest in a company unless, when the employee acquires the interest, the predominant business of the company is the acquisition, sale or holding of shares, securities or other investments (whether directly or indirectly through one or more companies, partnerships or trusts).

As ParentCo is not predominantly in the business of acquiring, selling or holding shares, securities or other investments (whether directly or indirectly through one or more companies, partnerships or trusts), subsection 83A-45(3) will apply to the RSUs and SSARs.

Subsection 83A-45(6) will apply to the RSUs and SSARs

Subsection 83A-45(6) applies to an ESS interest in a company if, immediately after the employee acquires the interest:

(a)  the employee will not hold a beneficial interest in more than 10% of the shares in the company, and

(b)  the employee will not be in a position to cast, or to control the casting of, more than 10% of the maximum number of votes that might be cast at a general meeting of the company.

For the purposes of subsection 83A-45(6), you are taken to hold a beneficial interest in any shares in the company that you can acquire under an ESS interest that is a beneficial interest in a right to acquire a beneficial interest in such shares; and be in a position to cast votes as a result of holding that interest in those shares (subsection 83A-45(7)).

As no participant will hold a beneficial interest in, or a right to acquire a beneficial interest in, more than 10% of the shares in ParentCo, nor will be able to cast, or control the casting of, more than 10% of the maximum number of votes that might be cast at a general meeting of ParentCo, after the allocation of awards under the Plan, subsection 83A-45(6) will apply to the RSUs and SSARs and paragraph 83A-105(1)(b) is satisfied.

Subsection 83A-105(3) will apply to the RSUs and SSARs

Subsection 83A-105(3) applies to an ESS interest acquired under an employee share scheme if, when the employee acquires the interest that is a beneficial interest in a right to acquire a beneficial interest in a share:

• there is a real risk that, under the conditions of the scheme, the employee will forfeit or lose the ESS interest (other than by disposing of it, exercising the right or letting the right lapse), or
• there is a real risk that, under the conditions of the scheme, if the employee exercises the right, the employee will forfeit or lose the beneficial interest in the share (other than by disposing of it).

Paragraph 1.156 of the Explanatory Memorandum to the Tax Laws Amendment (2009 Budget Measures No. 2) Bill 2009 states the following:

The 'real risk of forfeiture' test does not require employers to provide schemes in which their employee share scheme benefits are at a significant or substantial risk of being lost. However, 'real' is regarded as something more than a mere possibility. Something is not a real risk if a reasonable person would disregard the risk as highly unlikely to occur or as nothing more than a rare eventuality or possibility.

RSUs granted under the Plan are subject to vesting conditions that involve continual employment and also, in the case of performance-based RSUs, the attainment of performance goals over a performance period. Certain rules apply to determine the extent of vesting (if any) if a participant does not remain continuously employed.

Any RSUs that do not vest are forfeited and cancelled.

To exercise an SSAR granted under the Plan, a participant must remain continuously employed for a certain period of time. Certain rules apply to determine the extent to which the SSAR is exercisable if the participant does not remain continuously employed.

Any SSAR that does not meet the exercise conditions will expire (in part or in full) and may not be exercised.

As there is a real risk of forfeiture under the conditions of the Plan, subsection 83A-105(3) will apply to the RSUs and SSARs and paragraph 83A-105(1)(d) is satisfied.

Conclusion

Where a deferred taxing point occurs during a financial year in relation to awards granted to its Australian-resident employees under the Plan, SubCo will have reporting obligations for the year under paragraph 392-5(1)(b) of Schedule 1 to the TAA.