Edited version of private advice

Authorisation Number: 1052251925185

Date of advice: 27 May 2024

Ruling

Subject: ESS - start-up concession

Question 1

Will the discount on the vested Performance Rights issued to you by the Australian Company on XX November 20XX be included in your assessable income for the income year ending 30 June 20XX pursuant to section 83A-25 of the Income Tax Assessment Act 1997?

Answer

Yes.

Question 2

Will the ESS Interest discount on the Performance Rights as an ESS Interest issued by the Australian Company on XX November 20XX be wholly reduced by the start-up concession as provided in section 83A-33 of the Income Tax Assessment Act 1997?

Answer

No.

This ruling applies for the following period:

1 July 20XX - 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You are a Director of an Australian company and were a Director for the period of the ruling. In an effort to remunerate staff for their performance with the company, the company invited you to participate in an Employee Share Scheme (ESS) on XX September 20XX. You were invited to subscribe for XX shares in the company at a point before the company had decided to list publicly on the Australian Stock Exchange. You were provided an additional XX shares under the relevant ESS prior to XX October 20XX.

On XX October 20XX by way of company resolution, the company had determined to list publicly on the Australian Stock Exchange. On this date the company had made a number of board approved resolutions including, but not limited to; approval to list the company, change of company status, change of company name, replacement of constitution and an approval to restructure the existing capital such that every X share be split into X.X shares. Following the resolutions made by the company you now had XX ESS shares awarded to you under the approved ESS. You acquired no more than those shares and this was reported in your income tax return for the year ending 30 June 20XX. You did not pay any tax on those shares because they were acquired under the start-up concession scheme in accordance with section 83A-33 of the Income Tax Assessment Act 1997 (ITAA 1997).

On XX November 20XX you were provided with an additional invitation to participate in the approved company ESS for XX Performance Rights that would vest into ordinary shares at the conclusion of a 3 year holding period. You have provided a copy of the 'Employee Securities Incentive Plan' drafted by XX Lawyers for the company that details the rights and responsibilities associated with participation in the ESS. Despite the letter being dated after the approved capital restructure, the quote of the XX Performance Rights is a pre-restructure quote. The number of Performance Rights actually received was XX and this was confirmed in the later vesting notice you received from the company dated XX October 20XX.

Of the XX Performance Rights issued, these interests would only vest into ordinary shares upon the Company's XX-day Volume Weighted Average Price (VWAP) equalling or exceeding a pre-determined value following the listing of the company on the Australian Stock Exchange (ASX). In the invitation document dated XX November 20XX the Performance Rights are broken down into four categories with different VWAP values with an increasing value, the invitation quotes each category is worth XX Performance Rights however this is a pre-restructure quote so the actual Performance Rights as at this date would be XX per category. These figures are again confirmed in the vesting notification on XX October 20XX.

Each ordinary share held with the company provides the owner with one vote at each general meeting of the company as per the Constitution of the company. As part of the invitation to subscribe for the Performance Rights it was indicated that the Performance Rights do not confer the holder with an entitlement to vote or receive dividends until they vest into ordinary shares. Upon vesting, each Performance Right will, at the election of the holder, convert into one fully paid ordinary share so long as the Performance condition is met by the expiry date as indicated in the invitation.

You have provided a copy of the Constitution of the company which explains that in your position as Director you were not entitled to any additional votes beyond those provided to you by way of existing shareholding. You purchased an additional XX shares in the company for $X.XX a share on XX May 20XX as part of the Initial Public Offering, your total shareholding as at this date was XX shares.

On XX October 20XX the companies VWAP exceeded $X.XX but not more than $X.XX as such, of the XX Performance Rights only XX had vested with the remaining XX outstanding. On this date the initial XX converted into fully paid ordinary shares with other XX remaining as Performance Rights until the VWAP exceeds $X.XX, $X.XX or the Performance Rights expire on XX October 20XX. For the income year ending XX June 20XX the accountant of the company classified the XX vested Performance Rights as ordinary shares obtained under a deferral scheme and has included a deferral discount of $XX in your taxable income. You have challenged their position on this explaining that they should also be subject to the start-up concession in 83A-33 of the ITAA 1997 and they have not provided you with a reason as to why they have included the discount in the ESS Statement as a taxable discount.

The company first listed publicly in the 20XX tax year and for the income year immediately prior the company was not listed on any approved stock exchange prior to its listing on the ASX in 20XX. The company commenced trading on XX November 20XX and has not yet been trading for 10 years. The companies income in the year prior to listing was less than $1m, during the period of the ruling the company was ultimately owned by a domestic holding company and during the 20XX income year the total aggregate income of the group was less than $50m.

In valuing the Performance Rights for the purposes of the Start-up exception, you have obtained a valuation of the exercise price of the Performance Rights in accordance with ESS 2015/1 performed by a valuer. The valuation of the Performance Rights values the Rights to be worth nil in accordance the Commissioners approved valuation methodology. The company is a resident company of Australia and the ESS Plan is available to at least 75% of permanent employees in accordance with the provided details of the ESS Plan. When the Performance Rights were granted to you, you did not hold more than 9.9% interest in the company and had less than 9.9% of the votes at a meeting of the company.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 83A-10

Income Tax Assessment Act 1997 section 83A-25

Income Tax Assessment Act 1997 section 83A-33

Income Tax Assessment Act 1997 section 83A-45

Income Tax Assessment Act 1997 subsection 83A-105(2)

Income Tax Assessment Act 1997 subsection 83A-110

Question 1

Reasons for decision

Section 83A-25(1) of the ITAA 1997 provides:

"Your assessable income for the income year in which you acquire the * ESS interest includes the discount given in relation to the interest."

During the 20XX income tax year the taxpayer had XX of his Performance Rights vest into ordinary shares of the company. The Performance Rights are rights to acquire shares once certain conditions have been met that are consistent with the terms in the invitation to participate in the plan. As the Performance Rights are subject to a real risk of forfeiture before they vest they are subject to deferred taxation where the taxing point of the Performance Right will occur at a later point in time from when you acquired the interest consistent with section 83A-120 of the ITAA 1997.

Under deferred taxation, the amount to be included in assessable income for the income year in which the deferred taxation point occurs is the market value of the ESS interest (at the deferred taxing point) reduced by the cost base of the ESS interest consistent with section 83A-110(1) of the ITAA 1997.

For the income tax year ending 30 June 20XX you were granted XX ordinary shares from your Performance Rights initially granted to you on XX November 20XX. The market value of the vested Performance Rights less the cost base for those assets is $XX. This amount will be included in your assessable income for the income tax year ended 30 June 20XX.

Question 2

Reasons for decision

It is an important distinction that when we apply Subdivision 83A-B of the Income Tax Assessment Act 1997 (ITAA 1997) we apply it to the ESS interest in question. Not the resulting share that the ESS Interest relates to, this is because the taxpayer was not granted the share but instead a Performance Right, being an ESS Interest, that would relate and convert to an ordinary share once the vesting conditions were met.

Section 83A-33(1) of the ITAA 1997 provides:

"(1) Reduce the total amount included in your assessable income under subsection 83A - 25(1) for an income year by the total of the amounts included in your assessable income under that subsection, for the income year, for * ESS interests to which all of the following provisions apply:

(a) subsections (2) to (6) of this section;

(b) section 83A - 45 (about further conditions);

(c) for ESS interests that are beneficial interests in * shares--subsection 83A - 105(2) (about broad availability of schemes)."

The taxpayers assessable income of $XX, arising from the vested Performance Rights may only be reduced if the conditions in subsections 83A-33(2) to (6), section 83A-45 and subsection 83A-105(2) of the ITAA 1997 are met. ESS Interest is defined at subsection 83A-10 (1) of the ITAA 1997 to include beneficial interests in rights to acquire a share or beneficial interest in a share. The Performance Rights are ESS Interests because they are beneficial interests in rights to acquire shares that include additional performance restrictions.

Subsection 83A-33(2) of the ITAA 1997 provides:

"(2) This subsection applies to an * ESS interest in a company (the first company ) if no * equity interests in any of the following companies are listed for quotation in the official list of any * approved stock exchange at the end of the first company's most recent income year before you acquired the interest:

(a) the first company;

(b) any * subsidiary of the first company at the end of that income year;

(c) any holding company (within the meaning of the Corporations Act 2001 ) of the first company at the end of that income year;

(d) any subsidiary of a holding company (within the meaning of that Act) of the first company at the end of that income year."

The company that issued the ESS interest cannot be listed on any "approved stock exchange" at the end of the issuing company's most recent income year prior to issuing the ESS interest. The company issued the interests to the taxpayer in the 20XX income tax year and they listed on the ASX in the 20XX tax year. There was no listing in the 20XX tax year, the requirement is satisfied.

Subsection 83A-33(3) of the ITAA 1997 provides:

"(3) This subsection applies to an * ESS interest in a company if:

(a) the company (the first company); and

(b) each of the other companies referred to in subsection (2);

was incorporated by or under an * Australian law or * foreign law less than 10 years before the end of the first company's most recent income year before you acquired the interest."

The company that issued the ESS interest, must also have been incorporated for less than 10 years. The company commenced trading on XX November 20XX and has not been trading for 10 years. This requirement is satisfied.

Subsection 83A-33(4) of the ITAA 1997 provides:

"(4) This subsection applies to an * ESS interest in a company if the company has an * aggregated turnover not exceeding $50 million for the company's most recent income year before the income year in which you acquire the ESS interest.

Note: For working out aggregated turnover, see also subsection (7)."

The "start-up" concession is available if the issuing company has an "aggregated turnover" that is $50m, or less. The aggregated turnover is determined for the issuing company's most recent income year, prior to issuing the ESS interest. During the 20XX income year the total turnover for the company was less than $50m. Their ultimate parent company also had total income of less than $50m in the 20XX income year. The aggregate income of the linked entities is less than $50m. There are no other linked entities, as such this requirement is satisfied.

Subsection 83A-33(5) of the ITAA 1997 provides:

"(5) This subsection applies to an * ESS interest in a company if:

(a) in the case of an ESS interest that is a beneficial interest in a * share--the discount on the ESS interest is no more than 15% of its * market value when you acquire it; or

(b) in the case of an ESS interest that is a beneficial interest in a right--the amount that must be paid to exercise the right is greater than or equal to the market value of an ordinary share in the company when you acquire the ESS interest."

It is a condition of accessing the start-up concession for the discount to be "small". For rights, a discount is "small" if the exercise price is greater than or equal to the market value of an ordinary share in the company at the time the taxpayer acquired the right. In valuing the rights, the Commissioner has published ESS 2015/1 to calculate the value of unlisted shares using net tangible assets per share. The taxpayer has provided a valuation from XX that uses the approved valuation method to determine their value to be nil. There was no exercise cost for the shares and as such the exercise cost equals the value per the XX valuation. This requirement is satisfied.

Subsection 83A-33(6) of the ITAA 1997 provides:

"(6) This subsection applies to an * ESS interest you acquire under an * employee share scheme if, when you acquire the interest, your employer is an Australian resident."

Subsection 83A-33(6) of the ITAA 1997 requires the employer to be a resident taxpayer. The company is a resident for the purposes of Australian taxation and the requirement is satisfied.

Subsection 83A-33(7) of the ITAA 1997 is a provision to remove venture capital and similar firms, it has no application in the present case.

In addition to the requirements of section 83A-33 of the ITAA 1997 the start-up concession is only available if a taxpayer's ESS interests meet the general conditions in section 83A-45 of the ITAA 1997 and must be available to at least 75% of permanent employees who have completed at least 3 years of service per subsection 83A-105(2) of the ITAA 1997.

Subsection 83A-45(1) of the ITAA 1997 provides:

"(1) This subsection applies to an * ESS interest in a company if, when you acquire the interest, you are employed by:

(a) the company; or

(b) a * subsidiary of the company."

This subsection requires you to be employed by the company and the taxpayer was an employee of the Company when the Performance Rights were issued, this requirement is satisfied.

Subsection 83A-45(2) of the ITAA 1997 provides:

"(2) This subsection applies to an * ESS interest you acquire under an * employee share scheme if, when you acquire the interest, all the ESS interests available for acquisition under the scheme relate to ordinary * shares."

This subsection requires that all the ESS interests available for acquisition under the scheme relate to ordinary shares. The taxpayer has provided a copy of the invitation to participate in the ESS incentive plan dated XX November 20XX. Paragraph X of the invitation provides that "Upon vesting, each Performance Right will, at your election, convert into one fully paid ordinary share in the Company (Share)." This requirement is satisfied.

Subsection 83A-45(3) of the ITAA 1997 provides:

"(3) This subsection applies to an * ESS interest in a company unless, when you acquire the interest:

(a) the predominant business of the company (whether or not stated in its constituent documents) is the acquisition, sale or holding of * shares, securities, or other investments (whether directly or indirectly through one or more companies, partnerships, or trusts); and

(b) you are employed by the company; and

(c) you are also employed by any other company that is:

(i) a * subsidiary of the first company; or

(ii) a holding company (within the meaning of the Corporations Act 2001 ) of the first company; or

(iii) a subsidiary of a holding company (within the meaning of the Corporations Act 2001 ) of the first company."

This subsection is an integrity provision that seeks to remove companies where the predominant business of the company (whether or not stated in its constituent documents) is the acquisition, sale or holding of shares, securities, or other investments (whether directly or indirectly through one or more companies, partnerships, or trusts). The company is about technology development for a specific industry, there is no evidence to suggest it is in the business of shareholding or securities trading. This requirement is satisfied.

Subsection 83A-45(4) of the ITAA 1997 provides:

"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."

This subsection requires that every acquirer of an ESS interest under the scheme is not permitted to dispose of the interest during the minimum holding period.

Subsection 83A-45(5) of the ITAA 1997 defines the minimum holding period to be 3 years or otherwise as determined by the Commissioner:

"(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 that 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 section applies to the Performance Rights and refers to "the interests *minimum holding period". This is an express reference to a minimum holding period for the ESS Interest and not a minimum holding period for the resulting ordinary share. When you convert an ESS interest into an ordinary share, this is a disposal. It is a disposal because the Performance right ceases to be an ESS Interest per the definition in subsection 83A-10(1) of the ITAA 1997 and converts to an ordinary share with no further restrictions under the ESS Scheme.

The conversion of an ESS Interest to an ordinary share is a disposal for the purposes of the ITAA 1997 because the rights, entitlements and character of the interest materially changes. The ESS Interest was in the taxpayers name prior to vest with all the rights and entitlements as described in the invitation dated XX November 20XX, after vesting the taxpayer no longer held that ESS interest and acquired a new asset being the ordinary shares that prior to vest was held by the company for the taxpayers benefit.

ATO records indicate the taxpayer ceased employment with the company on XX October 20XX, for the purposes of subsection 83A-45(5) of the ITAA 1997 the minimum holding period will be the earlier of 3 years from grant or the difference between grant and employment ceasing. You were granted the Performance Rights on XX November 20XX. Your minimum holding period is the difference between the grant and your employment ceasing being 2 years 11 months and 17 days. Your Performance Rights vested on XX October 20XX and you received 1,150,000 ordinary shares with 1,150,000 Performance Rights remaining on issue. Your Performance Rights vested 2 years 11 months and 8 days since the issue of the Performance Rights, as such they have been held for a period shorter than the minimum holding period and the requirement in subsection 83A-45(4) of the ITAA 1997 is not met.

Notwithstanding the minimum holding period not being met, subsection 83A-45(4) of the ITAA 1997 still requires that the scheme is operates so that the taxpayer is not permitted to dispose of the rights during the 2 years 11 months and 17 day period. There is no such restriction in the invitation date XX November 20XX.

In relation to the invitation dated X November 20XX paragraph 2 provides:

"The Company hereby invites you to apply for the following performance rights (Performance Rights) under the Plan on the terms and conditions set out in this Invitation and Schedule 1 (Terms)...

The grant of the Performance Rights is subject to the terms of the Plan, including the Company obtaining any necessary Shareholder approval/s and you remaining an Eligible Participant at the time the Performance Rights are granted (unless the Board resolves otherwise) and, subject to a number of exceptions, vested and converted into Shares.

In the event of any inconsistency between the Plan and the Terms, the Terms will apply to the extent of the inconsistency."

The terms of the invitation dated XX November 20XX do not include any express reference to a restriction on the disposal of the Performance Rights other than the vesting condition that "upon the Company's 20-day Volume Weighted Average Price VWAP equalling or exceeding $0.XX following the listing of the company on the ASX, or if listing does not occur prior to XX April 20XX the fair value of ordinary shares being greater than $0.XX". With the figures growing in value for the different award of Performance Rights.

The Plan for the companies Employee Securities Incentive Plan was drafted by 'Lawyers A' and Clause X.X of the Plan contains the restrictions of dealing with all securities granted by the company. There is no restriction in this Plan requiring the holder of Performance Rights to restrain from disposing of them in a defined minimum holding period.

The Plan as drafted by 'Lawyers A' is an updated version of a historic plan that existed prior to XX December 20XX. For this historic plan, this was the plan in force when the Performance Rights were issued and was drafted by 'Lawyers B'. This historic plan includes a disposal restriction at clause X:

"Unless a participant disposes of an Equity Security under an arrangement which meets the requirements in section 83A-130 of the Tax Act, a legal or beneficial interest in an Equity Security may not be Disposed until the earlier of:

(a)           3 years after acquisition of the Equity Security or such earlier times as the Commissioner of Taxation allows in section 83A-45(5) of the Tax Act; and

(b)           the Participant becomes a Leaver."

It is the view of the Commissioner that the disposal restrictions in the historic plan are inconsistent with the restrictions in the invitation terms dated XX November 20XX. The Commissioner takes this view because the vesting conditions are expressly listed in the terms and there is an absence of a reference to a minimum holding period. Per the terms of the plan, if the vesting conditions were met prior to the minimum holding period then they would convert at that stage, there is an absence of express fact or instruction to suggest this would not occur in the terms dated XX November 20XX.

Clause X of the terms provides:

"Under the Plan, you may give the Board a written notice nominating a permitted nominee in whose favour you wish to renounce the Invitation, subject to the Board's approval. Examples of acceptable nominees are set out in the Plan. Please discuss this with the Company Secretary if you have any queries."

This clause indicates that you may dispose of the Performance Rights by way of written notice to the board. There is no requirement that the Performance Rights be held for a minimum period before you can dispose of the Rights by assignment in Clause X.

Clause X of the terms provides:

"Subdivision 83A-C of the Income Tax Assessment Act 1997, which enables tax deferral on performance rights, will apply (subject to the conditions in that Act) to Performance Rights granted to you under this Invitation."

Subdivision 83A-C of the ITAA 1997 relates to deferred taxing points for ESS interests, it does not relate to the start-up tax concession, this is contained in subdivision 83A-B of the ITAA 1997. When granting the Performance Rights, the company provided an express intention that the Performance Rights would be subject to deferred taxation and not the start-up concession.

In consideration of the express omission of a disposal restriction in the invitation terms dated XX November 20XX and in consideration of the relevant plans and other evidence provided to date. The Commissioner takes the view that there is no minimum holding period for the Performance Rights and the requirement in subsection 83A-45(4) of the ITAA 1997 is not met.

Subsection 83A-45(6) of the ITAA 1997 provides:

"(6) This subsection applies to an * ESS interest in a company if, immediately after you acquire the interest:

(a) you do not hold a beneficial interest in more than 10% of the * shares in the company; and

(b) you are not 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."

This subsection requires that when the taxpayer receive the ESS interest, being the Performance Rights, the taxpayer does not hold a beneficial interest in more than 10% of the shares in the company and the taxpayer does not hold more than 10% of the maximum votes that could be cast at a general meeting. The taxpayers position of Director on the board did not grant the taxpayer any additional voting rights.

The taxpayer acquired the Performance Rights on XX November 20XX. On XX November 20XX the taxpayer held XX shares each representing one vote. The taxpayer also held XX Performance Rights representing a beneficial interest in the ordinary shares that they would vest into. There were XX shares on issue at this date. The taxpayer's total percentage shareholding was 5.12%. With the XX Performance Rights the taxpayer's total percentage shareholding was 11.76%. As the performance rights can be considered to be a beneficial interest in a share your total beneficial interest for the purposes of subsection 83A-45(6) of the ITAA 1997 exceeded 10% and this requirement is not met.

In consideration of the relevant sections of the legislation and the supporting documentation as provided in the ruling application, the start-up concession in 83A-33 of the ITAA 1997 will not apply in relation to the Performance Rights granted on XX November 20XX. It is therefore not necessary to further consider the conditions in subsection 83A-105(2) of the ITAA 1997.