Edited version of private advice

Authorisation Number: 1052298478501

Date of advice: 10 September 2024

Ruling

Subject: Employee share scheme

Question

When the Deferred Payment is made before the deferred taxing point in section 83A-120 of the Income Tax Assessment Act 1997 (ITAA 1997), will the amount be included in the cost base of the Awards under subsection 110-25(6) of the ITAA 1997, for the purpose of calculating the discount of the ESS interests to be reported in the statement provided to the Commissioner and to a participant under section 392-5 of Schedule 1 to the Taxation Administration Act 1953?

Answer

Yes.

This ruling applies for the following period:

Income year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Company A is an unlisted Australian private company. Company A is seeking to implement an employee share plan (Plan).

The Plan is part of Company A's remuneration strategy and aims to ensure the long-term creation of value in Company A by:

•         Rewarding eligible participants (Participants) with options granted by Company A (Awards). Each Award represents a right to be issued a special class of share in the capital of Company A (Shares), subject to the terms of the Plan and the terms and conditions on which they are invited to participate in the Plan (Invitation).

•         Assisting with the retention of key talent personnel.

A Trust has been established in accordance with the terms of the Trust Deed to facilitate the implementation of the Plan.

Awards

The Plan will operate under the rules stated in the Plan.

Deferred Payment

The Participant must pay the Deferred Payment at a time when certain conditions are met.

The amount of the Deferred Payment will be specified in the Invitation., The Invitation also states 'you may exercise that Award for nil consideration...' It goes on to say 'To avoid doubt, the Plan Shares granted to you will be subject to Deferred Payment...'

If the Participant does not make the Deferred Payment within the specified timeframe, the Shares may be forfeited in accordance with the Plan. The Awards and Shares may also be forfeited in certain situations such where the Participant becomes a leaver, and other actions of the Participant, such as the failure to satisfy certain conditions, fraudulent or dishonest actions, insolvency or other similar events.

Where the shares are forfeited, the Participant must surrender ownership of the shares for an amount equal to the Forfeiture Value.

A Participant is restricted from disposing of the Plan Shares, unless it is in accordance with the Plan, the Invitation, the Constitution or any Shareholders Agreement. The Invitation states that the Plan Shares cannot be disposed of until an Exit Event is likely to occur. If the Exit Event is an Initial Public Offering (IPO), the Participant is prevented from disposing of the Plan Shares until the second anniversary of the date of completion of the IPO.

Relevant legislative provisions

Income Tax Assessment Act 1997 subdivision 83A-B

Income Tax Assessment Act 1997 subdivision 83A-C

Income Tax Assessment Act 1997 section 83A-105

Income Tax Assessment Act 1997 subsection 83A-110(1)

Income Tax Assessment Act 1997 section 83A-120

Income Tax Assessment Act 1997 Subdivision 110-A

Income Tax Assessment Act 1997 section 110-25

Income Tax Assessment Act 1997 subsection 110-25(6)

Taxation Administration Act 1953 section 388-50 of Schedule 1

Taxation Administration Act 1953 subsection 388-50(1) of Schedule 1

Taxation Administration Act 1953 Division 392 of Schedule 1

Taxation Administration Act 1953 section 392-5 of Schedule 1

Taxation Administration Act 1953 subsection 392-5(2) of Schedule 1

Taxation Administration Act 1953 subsection 392-5(3) of Schedule 1

Taxation Administration Act 1953 subsection 392-5(4) of Schedule 1

Reasons for decision

Summary

The Deferred Payment will be included in the cost base of the Awards under subsection 110-25(6) of the ITAA 1997, for the purpose of calculating the discount of the ESS interests to be reported in the statement provided to the Commissioner and to a Participant under section 392-5 of Schedule 1 to the TAA, when the payment is made before the deferred taxing point in section 83A-120 of the ITAA 1997.

Detailed reasoning

Section 392-5 of Schedule 1 to the TAA

Section 392-5 of Schedule 1 to the TAA requires an entity (the provider) to give a statement to the Commissioner and to an individual in the following circumstances:

•         if the provider provides ESS interests to the individual during the year and Subdivisions 83A-B or 83A-C of the ITAA 1997 apply to the interests, or

•         if a provider provided ESS interests to the individual during the year or an earlier year, Subdivision 83A-C of the ITAA 1997 applies to the interests and an ESS deferred taxing point for the ESS interests occurs during the year.

Relevantly, Subdivision 83A-C of the ITAA 1997 applies to participants, if at the time they acquired the ESS interests, the Plan genuinely restricted them from immediately disposing them (subsections 83A-105(1) and (6)).

Subsection 392-5(2) of Schedule 1 to the TAA provides that the statement must be in the approved form. Subsection 392-5(3) lists information that may be required to be disclosed within the approved form. However, subsection 392-5(4) states that subsection 392-5(3) does not limit the information that the approved form may require the statement to contain.

Subsection 388-50(1) of Schedule 1 to the TAA provides that a statement is in the approved form if it is in the form approved in writing by the Commissioner for that statement, contains a declaration signed by the required person and contains the all the required information plus any further information, statement or document required by the Commissioner.

Although, subsection 392-5(3) of Schedule 1 to the TAA specifies information that may be contained in the approved form for the purposes of section 392-5, the Commissioner can determine the information that is required to be contained in the statement in accordance with subsection 392-5(4) and section 388-50.

The Commissioner has approved the form entitled 'Employee share scheme annual report' to be given to the Commissioner, and a form entitled 'Employee share scheme statement' to be given to the Participant. Both of these forms are approved forms in accordance with section 388-50 of Schedule 1 to the TAA that meet the reporting requirements specified in section 392-5.

The 'Employee share scheme annual report' must be lodged electronically with the ATO. The report must contain the 'Acquisition price of shares acquired under a deferral scheme' and the 'Discount from deferral schemes with a deferred taxing point during the year'. The 'Employee share scheme statement' form requires reporting of the 'Discount from deferral schemes'.

The term 'discount' is not defined in Division 83A of the ITAA 1997. Guidance on the ATO website states that if an employee acquires ESS interests under a tax-deferred scheme, the discount is the market value of the ESS interests at the deferred taxing point, reduced by the cost base of the interests.

The discount amount required to be reported on the forms mentioned above aligns with the amount that is required to be included in the assessable income of the Participant for the relevant income year in accordance with subsection 83A-110(1) of the ITAA 1997.

Consequently, Company A must calculate the cost base of the ESS interests under section 110-25 of the ITAA 1997 to enable it to report the discount of interests in the statements to the Commissioner and the Participant in accordance with section 392-5 of Schedule 1 to the TAA.

Cost base

Subdivision 110-A of ITAA 1997 contains the rules for working out the cost base of a CGT asset. Section 110-25 provides that there are five elements of the cost base.

Subsection 110-25(6) of the ITAA 1997 provides that the fifth element of the cost base is the capital expenditure incurred by the taxpayer to establish, preserve or defend the taxpayer's title to, or a right over, the asset. The expenditure can include giving property.

Macmillan Publishers Australia, Macquarie Dictionary online, accessed 2 August 2024 defines 'preserve' to include 4. to keep possession of; retain: to preserve one's composure.

In this situation, the Deferred Payment must be paid within 30 days of the Participant becoming Leaver or an Exit Event occurring, unless determined by the Board. If the Participant does not make the Deferred Payment within the specified timeframe, the Shares may be forfeited in accordance with the Plan.

Therefore, when the Participant makes the Deferred Payment, the payment is a capital amount that has been incurred by the Participant to retain title to the ESS interests and ensure they are not forfeited.

It is considered that the exclusions to the cost base contained in Subdivision 110-A of the ITAA 1997 will not apply in this situation. Primarily because the Participant will not be eligible to deduct the Deferred Payment as it is expenditure of a capital nature, and it is not a recoupment.

Consequently, the Deferred Payment will be included in the cost base of the Awards under subsection 110-25(6) of the ITAA 1997, for the purpose of calculating the discount of the ESS interests to be reported in the statement provided to the Commissioner and to a Participant under section 392-5 of Schedule 1 to the TAA, where the payment is made before the deferred taxing point in section 83A-120.