Edited version of private advice

Authorisation Number: 1052251702095

Date of advice: 16 May 2024

Ruling

Subject: Deferred taxing point

Question 1

Is the deferred taxing point under section 83A-120 of the Income Tax Assessment Act 1997 (ITAA 1997), for the Options granted to you, not the date when you exercised the Options?

Answer

Yes, as you were genuinely restricted from disposing of your ESS interest at the time of exercising the Options.

Question 2

Is the deferred taxing point under section 83A-120 of ITAA 1997, the date when you are no longer genuinely restricted from disposing of the Shares acquired when you exercised the Options?

Answer

Yes,however the deferred taxing point can change should you dispose of your ESS interest within 30 days of the deferred taxing point. In this instance the deferred taxing point will instead be the date of that disposal.

Question 3

For the purposes of calculating the discount amount included in your assessable income under section 83A-110 of the ITAA 1997, is the market value of your ESS Interest the market value of the Shares on the date you are no longer genuinely restricted, and is the cost base value of your ESS Interest $nil?

Answer

Yes, the market value of the ESS Interest at the deferred taxing point is the market value of the Shares at that time. As the Options were granted to you for nil consideration, and no amount was paid to exercise the Options, the first element of the cost base is nil.

Question 4

Should you sell or dispose of the Shares acquired when exercising the Options, will capital gains tax (CGT) event A1 occur as per subsection 104-10(1) of the ITAA 1997?

Answer

Yes, CGT event A1 will happen when you dispose of your Shares.

Question 5

For the purposes of calculating any capital gains, is the cost base the market value of the Share immediately after the deferred taxing point as per section 83A-125 of the ITAA 1997?

Answer

Yes, for ESS interests held after their deferred taxing point a share is taken to have been re-acquired "immediately after" the deferred taxing point. This resets the cost base of the ESS interest to market value at that time.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

1 July 2020

Relevant facts and circumstances

You are an Australian resident for tax purposes.

You've been employed by the Company since DD Month 20YY.

You accepted Options under an Incentive Option Plan (Plan) approved by shareholders on DD Month 20YY. Schedule 2 of your Offer of Employment (Offer) set out Terms and Conditions of the Options.

Provided you remained employed by the Company, a total of X Options were to be issued as follows:

•         X Options to vest and become exercisable 12 months after the date of issue,

•         X Options to vest and become exercisable 24 months after the date of issue, and

•         X Options to vest and become exercisable 36 months after the date of issue.

On exercise of your vested Options, you were entitled to receive Shares in the Company.

The Options were granted to you for nil cash consideration, at the exercise price of $x.xx each.

Your Options vested on the following dates:

•         X Options vested DD Month 20YY,

•         X Options vested DD Month 20YY, and

•         X Options vested DD Month 20YY.

On DD Month 20YY you exercised the full X Options using the cashless exercise facility provided for in clause X of the Plan and paragraph (X) of Schedule 2 of the Offer.

Instead of receiving X Shares for $x.xx; you received X Shares for nil cash consideration.

You did not dispose of any Shares at the time you exercised the Options.

Your holding statement for the Company's ordinary fully paid Shares for DD May 20YY shows:

Table 1: Holding statement

Clause X of the Plan sets out restrictions on dealing in shares including:

•         The Board may, in its discretion, determine at any time up until exercise of Options, that a restriction period will apply to some or all of the Shares issued to a Participant on exercise of those Options, up to a maximum of seven years from the grant date of the Options.

•         The Board may, in its sole discretion, waive this restriction period.

•         A Participant must not dispose of or otherwise deal with any Shares while they are restricted.

In an email exchange dated DD Month 20YY and DD Month 20YY, the Company confirmed they'd been in a trading blackout period since DD Month 20YY and no requests to trade had been granted since that date.

Clause X of the Company's Trading Policy imposes a prohibition on insider trading. Due to the nature of your position, you are in possession of insider information and subject to restrictions on trading your Shares.

In a letter dated DD Month 20YY, the Company confirmed that since acquiring your Shares you have been and continue to be in possession of price sensitive information that is not available to the market, and that trading Company shares would be a breach of Clause X of the Trading Policy.

The Company advise the programs this information relates to are anticipated to be completed and released to the market in early Month 20YY. The first available trading window when you could sell your Shares will occur two days post release of the Annual Report which is expected before DD Month 20YY.

You will sell your Shares in a future income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 section 83A-110

Income Tax Assessment Act 1997 section 83A-115

Income Tax Assessment Act 1997 section 83A-120

Income Tax Assessment Act 1997 section 83A-125

Income Tax Assessment Act 1997 section 83A-340

Income Tax Assessment Act 1997 Subdivision 83A-C

Income Tax Assessment Act 1997 Division 104

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 Division 110

Income Tax Assessment Act 1997 section 110-25

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.

Indeterminate rights

Subsection 83A-340 applies where you acquire a beneficial interest in a right that later becomes a right to acquire a beneficial interest in a share. This is referred to as an indeterminate right.

The examples in section 83A-340 illustrate that the provision is intended to apply to the following types of rights:

•         a right where the employer has discretion to satisfy the right by provision of a share, or by payment of cash (or provision of something other than shares); and

•         a right where the number of shares that may be acquired at a future time is indeterminate at the time of grant of the rights.

You were granted Options that would ultimately result in you acquiring shares, however at the time the Options were granted the number of Shares you would acquire on exercise was unknown as it depended on whether you elected to pay a cash exercise price or utilise a cashless exercise facility.

In our view, the Options were indeterminate rights as the number of Shares you would acquire was uncertain and unascertainable at the time the Options were granted. The Options were therefore not ESS interests on grant, however from the time your Options were exercised and settled with a share, section 83A-340 applies and your Options are treated as if they had always been a right to acquire a beneficial interest in a share.

ESS deferred taxing point

Subdivision 83A-C 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 right to acquire a beneficial interest in a share that was granted on or after 1 July 2015 is determined under section 83A-120. Relevantly, the deferred taxing point for your Options will be 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 (subsection 83A-120(7)).

However, the deferred taxing point can change should you dispose of an ESS interest (the Shares you acquired on exercise of the Options) within 30 days of the deferred taxing point. In this instance the deferred taxing point will instead be the date of that disposal. This is called the 30-day rule (83A-115(3)).

Genuine selling restrictions

For the purposes of Division 83A the term 'genuinely restricted' is not defined and therefore takes on its ordinary meaning. 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) sets out the Commissioner's view for working out when a scheme's restrictions are genuine disposal restrictions and when you would no longer be 'genuinely restricted' for the purposes of determining the deferred taxing point.

Paragraph 21 of TD 2022/4 states that 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).

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).

Further paragraph 30 of TD 2022/4 explains the scheme will no longer restrict you at the commencement of the first trading window, or the first trading date after the restrictions are lifted, even if they are listed only temporarily.

It is our view that you are genuinely restricted. You provided contemporaneous evidence to demonstrate that since exercising your Options you have been in possession of price sensitive information, and there will be no trading windows available for you to dispose of your ESS interests until certain information is released in August 20YY.

Amount to be included in assessable income

Section 83A-110 provides that your assessable income for the year in which the ESS deferred taxing point occurs is to include the market value of the ESS interest at the deferred taxing point reduced by the cost base of the interest.

Where the ESS interest is a right to acquire a beneficial interest in a share, the market value of the right at the ESS deferred taxing point is the market value of the share at that time.

In your case, you elected to use the cashless exercise facility and did not pay anything when exercising the Options. As the Options were granted for nil consideration, and no amount was paid to exercise the Options, the first element of the cost base is nil (subsections 83A-110(1) and 110-25(2)).

CGT on disposal of ESS interest

Section 83A-125 deals with the tax treatment of ESS interests held after their deferred taxing point.

Relevantly, a share is taken to have been re-acquired "immediately after" the deferred taxing point. This resets the cost base of the ESS interest to market value at that time and resets the acquisition date.

After the ESS treatment of your Options under Division 83A has been finalised, the CGT provisions take over in respect of the CGT asset. CGT event A1 will happen when you dispose of your Shares (subsection 104-10(1)).

You will make a capital gain from the disposal if the capital proceeds (the amount you receive or are entitled to receive from the event) from the disposal are more than the cost base (subsection 104-10(4)).

Subdivision 115-A contains the rules for what is considered a discount capital gain. Where you hold a CGT asset as an Australian resident individual for more than 12 months since the date of acquisition, the capital gain discount percentage you can apply to your capital gain is 50%.