Edited version of private advice

Authorisation Number: 1052340452484

Date of advice: 9 December 2024

Ruling

Subject: Employee share scheme

Question 1

Will A Co have reporting obligations under paragraph 392-5(1)(b) of Schedule 1 to the Taxation Administration Act 1953 (TAA) in relation to the Rights granted to its Australian-resident employees under the Plan, which are settled with Shares, in the income year the ESS deferred taxing point occurs?

Answer 2

Yes.

This ruling applies for the following periods:

Income years ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

A Co is a listed Australian public company.

The predominant business of A Co is not the acquisition, sale or holding of shares, securities or other investments (whether directly or indirectly through one or more companies, partnerships or trusts).

A Co provides eligible employees with an opportunity to acquire equity in the company to align the interests of employees and shareholders.

The Plan is designed to provide directors with the opportunity to acquire Rights using their fees. Participation facilitates directors reaching the shareholding qualification requirement.

The Plan is governed by the Plan Rules, adopted by the Board in XX 20XX, and the relevant explanatory notes in relation to the relevant offer. To the extent of any inconsistency, the explanatory notes will prevail followed by the Plan Rules.

Under the Plan Rules, the Board may offer Rights, Options, Restricted Shares and Units. Rights are defined under the Plan Rules as 'an entitlement to receive a Share or in certain circumstances, to a cash payment, subject to satisfaction of applicable conditions...'.

Share is defined under the Plan Rules as a fully paid ordinary share in the capital of A Co.

Participation in the Plan is voluntary. Each director is an Eligible Employee as defined under the Plan Rules.

If a director elects to participate, they nominate a fixed amount of their fees to be deducted during the financial year commencing 1 July and ending 30 June (Plan Year).

The amount nominated will be deducted from the participating director's pre-tax fees in equal instalments each monthly pay cycle, commencing in July.

The amount deducted will be held on trust in a non-interest bearing account that is kept solely for that purpose, prior to those funds being used to acquire Shares upon vesting.

The participating director can amend their level of participation during the Plan Year and elect to cease participation at any time.

The election to participate in the Plan will cease at the end of each Plan Year, with a new election required to be lodged to participate in the following Plan Year.

The Rights are granted on or around the XX business day following the date on which the Shares commence trading ex-dividend immediately following the date on which A Co publicly releases its annual financial report for the previous financial year (ex-dividend date).

The number of Rights granted is equal to the total participation amount nominated for the Plan Year, divided by the 10-day volume-weighted average price of Shares from the ex-dividend date after the announcement of the annual results around August.

Rule XX of the Plan Rules provides that, unless the Board determines otherwise, no payment is required for the grant of a Right and where the offer is made to an Eligible Employee in Australia, Subdivision 83A-C will apply to the Rights.

The participating director must be a director of A Co when the Rights are granted and when the Shares are allocated, in order to receive the Rights and the Shares under the Plan.

The Rights will vest in two equal allocations, each being half the number of Rights granted for the relevant Plan Year:

•                     Tranche 1 will vest shortly after A Co releases its half-yearly financial report for the relevant Plan Year.

•                     Tranche 2 will vest shortly after A Co releases its annual financial report for the relevant Plan Year.

Once the Rights are vested, they will automatically exercise into Shares and the Shares will be allocated.

When the Rights are exercised, the Trustee of the Employee Share Trust will acquire the Shares on market and transfer the Shares into the participating director's name.

Until the Shares are allocated to Participants following the automatic exercise of the Shares, the Shares will be held as unallocated trust property.

At the time an offer is made or at any time prior to vesting or exercise of the Right, the Board may determine the vesting of some or all Rights will be satisfied by a cash payment, instead of an allocation of Shares.

The Board has absolute discretion to adjust the number of a Participant's Rights (upwards or downwards) that vest. Where the Board decides to reduce the number of Rights that vest, those Rights that would otherwise have vested will lapse.

The Rights cannot be traded prior to vesting and allocation of the Shares.

Once the Shares are transferred into the director's name, the director will hold the Shares subject to trading restrictions.

•                     The Shares are subject to a default 3-year restriction period while the director remains a director (Trading Restriction Period).

•                     At the time of applying to participate in the Plan, the director may elect a longer Trading Restriction Period up to a maximum of 15 years from the start of the Plan Year. The Trading Restriction Period cannot be adjusted once the Plan Year has commenced.

•                     During the Trading Restriction Period, the Shares cannot be traded and must not be disposed of until the earliest of:

­        the nominated restriction period ending

­        cessation as a director of A Co, or

­        when there is a change of control event as defined in the Plan Rules.

•                     A Co will instruct the share registry to apply a holding lock to the allocated Shares for the term of the Trading Restriction Period.

•                     At the end of the Trading Restriction Period (or the end of a Blackout Period if the Trading Restriction Period ends during that period), the restrictions on the Shares will cease.

•                     Once the restrictions cease, the Shares can be sold or transferred, subject to A Co's Trading Policy.

•                     A Co's Trading Policy imposes additional trading restrictions on its directors.

•                     Under the Plan Rules, the Board has discretion to waive the disposal restrictions. Such a discretion will only be exercised in rare circumstances, such as severe financial hardship of the Participants.

Where there is an actual change in the Control of the Company, unless the Board determines otherwise:

•                     all Restricted Shares will immediately vest in full and any restrictions on Dealing imposed cease to have effect, and

•                     all other unvested Rights will immediately vest or cease to be subject to restrictions on a pro-rata basis having regard to the portion of the Vesting Period that has elapsed.

If a participating director ceases to be a director of A Co before the end of the restriction period, the Rights and Shares will be treated as follows:

•                     Unvested Rights will vest on a pro-rata basis, with the remaining unvested Rights lapsing.

•                     Vested Rights will be automatically exercised, and unrestricted Shares will be delivered.

•                     Shares - the trading restrictions on Shares are lifted.

Relevant legislative provisions

Taxation Administration Act 1953 paragraph 392-5(1)(b)

Income Tax Assessment Act 1997 Subdivision 83A-C

Income Tax Assessment Act 1997 section 83A-105

Income Tax Assessment Act 1997 section 83A-120

Income Tax Assessment Act 1997 section 83A-325

Income Tax Assessment Act 1997 section 83A-340

Reasons for decision

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

Paragraph 392-5(1)(b) of Schedule 1 to the TAA requires a provider to give a statement to the Commissioner and to an individual if:

(i)            the provider has provided ESS interests to the individual (whether during the year or during an earlier year)

(ii)           Subdivision 83A-C (about employee share schemes) applies to the interests

(iii)          the ESS deferred taxing point for the interests occurs during the year

Each of the requirements of paragraph 392-5(1)(b) of Schedule 1 to the TAA is considered below.

The provider has provided ESS interests to the individual

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

In the present case, A Co is the provider of the Rights issued under the Plan.

The Commissioner accepts that the Rights granted to the participating directors under the Plan are indeterminate rights for the purposes of section 83A-340 because at the time the Rights are granted, it is not clear whether the Rights will be satisfied by an allocation of Shares or a cash payment and it is unascertainable how many Shares the participating director is entitled to as the Board has the discretion to adjust the number of Rights that will vest under the Plan Rules.

The Rights are not rights to acquire a beneficial interest in Shares unless and until the time it is determined that the Rights will be satisfied by the provision of Shares and the number of Shares that the Participant is entitled to can be determined.

Once it is clear the Rights will be satisfied by the provision of Shares and the number of Shares the Participant is entitled to is determined, section 83A-340 operates to retrospectively deem the Rights to have always been ESS interests (being, rights to acquire a beneficial interest in shares). At that time, subparagraph 392-5(1)(b)(i) of Schedule 1 to the TAA is satisfied and A Co would have provided ESS interests to the director.

Subdivision 83A-C applies to the Rights

Subsection 83A-105(1) provides that Subdivision 83A-C applies 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 (about start ups) does not reduce the amount to be included in the 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; and

(ii)            subsection 83A-105(3) or (4) applies to the interest

(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.

We note, paragraph 83A-105(1)(c) is not relevant as the Rights granted under the Plan provide Eligible Employees with a beneficial interest in rights to acquire a beneficial interest in shares in A Co.

Subdivision 83A-B would, apart from section 83A-105, apply to the Rights

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)).

The Plan constitutes an employee share scheme as it is a scheme under which ESS interests in A Co are provided to the Eligible Employees in relation to their employment with A Co (subsection 83A-10(2)).

As the Rights are provided to participating directors for nil consideration, they are acquired at a discount.

Accordingly, paragraph 83A-105(1)(a) is satisfied.

After applying section 83A-315, there is still a discount given in relation to the interest

Section 83A-315 provides that if the regulations specify an amount to be used as the market value of an ESS interest, that amount must be used in relation to the interest for the purposes of applying Division 83A, where applicable.

As the Rights are provided to participating directors 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 (about start ups) does not reduce the amount to be included in the participant's assessable income in relation to the Rights

Subsection 83A-33(1) sets out the provisions that need to be satisfied for the start-up concession to apply and for the amount included in the participant's assessable income to be reduced.

•                     Subsections 83A-33(2) to (6)

•                     Section 83A-45 (about further conditions)

•                     Subsection 83A-105(2) - if the ESS interests are beneficial interests in a share.

In the present case, section 83A-33 does not apply because:

•                     A Co is a listed public company on the Australian Securities Exchange (subsection 83A-33(2)) and

•                     A Co has been incorporated for more than 10 years (subsection 83A-33(3)).

Accordingly, paragraph 83A-105(1)(ab) is satisfied.

Subsections 83A-45(1), (2), (3) and (6) apply to the Rights

Subsection 83A-45(1) applies to the Rights if the participant is employed by the company or a subsidiary of the company when the Rights are acquired.

A participating director must be a director of A Co to be a participant of, and acquire Rights under, the Plan. Directors are covered under item 1 of the table in section 83A-325 as they receive work and income support withholding payments and are employed by A Co. Therefore, subsection 83A-45(1) applies to the Rights.

Subsection 83A-45(2) applies to the Rights acquired under an employee share scheme if, when the participating directors acquire the Rights, all the Rights available for acquisition under the scheme relate to ordinary shares.

The Rights acquired by the participating directors under the Plan relate to fully paid ordinary shares in A Co. Therefore, subsection 83A-45(2) is satisfied.

Subsection 83A-45(3) applies to the Rights unless, when the participant 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).

The predominant business of A Co is not acquiring, selling or holding shares, securities or other investments. Therefore, subsection 83A-45(3) applies to the Rights.

Subsection 83A-45(6) applies to the Rights if, immediately after the participating director acquires the Rights:

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

(b)           [the director 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.

Immediately after a participating director acquires Rights under the Plan, no director will hold a beneficial interest in more than 10% of the Shares nor 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 A Co. Therefore, subsection 83A-45(6) applies to the Rights.

Accordingly, paragraph 83A-105(1)(b) is satisfied.

Subsection 83A-105(6) applies to the Rights

Subsection 83A-105(6) applies to an ESS interest acquired under an employee share scheme during an income year at a discount if:

(a)           the interest is a beneficial interest in a right; and

(b)           at the time the interest is acquired,

(i)            the scheme genuinely restricted the participant immediately disposing of the right, and

(ii)          ;  the governing rules of the scheme expressly stated Subdivision 83A-C applies to the scheme.

Taxation Determination TD 2022/4 Income tax: when are you genuinely restricted from immediately disposing of an interest provided under an employee share scheme? sets out the principles for working out whether a scheme's disposal restrictions were 'genuine disposal restrictions' and if they were, when the participant is no longer genuinely restricted by the scheme.

At the time the participating director acquires the Rights,

•                     the scheme genuinely restricts the director immediately disposing of the Rights because there is a Trading Restriction Period and a holding lock applied to the Shares. Further, additional trading restrictions are imposed by the A Co Trading Policy. Where the Board has the discretion to waive disposal restrictions under the Plan Rules, such a discretion will only be exercised in rare circumstances such as severe financial hardship of the director. The disposal restriction imposed during the Trading Restriction Period is still considered a genuine disposal restriction even though it is able to be lifted in exceptional circumstances (paragraph 14 of TD 2022/4).

•                     Rule 2.2(c) of the Plan Rules expressly states that Subdivision 83A-C applies to the scheme.

Therefore, subsection 83A-105(6) applies to the Rights.

Accordingly, Subdivision 83A-C applies to the Rights.

When the ESS deferred taxing point occurs

Section 83A-120 contains the rules for determining when the ESS deferred taxing point occurs for a beneficial interest in a right to acquire a share. This will be the earliest of the times mentioned in subsections 83A-120(4), (6) and (7), subject to subsection 83A-120(3).

(4)           The first possible taxing point determined under subsection 83A-120(4) is when:

(a)           the participant has not exercised the right,

(b)           there is no real risk that the participant will forfeit or lose the ESS interest (other than by disposing of it, exercising the right or letting the right lapse) under the conditions of the employee share scheme, and

(c)           if, at the time the participant acquired the ESS interest, the scheme genuinely restricted them immediately disposing of the ESS interest - the scheme no longer so restricts you.

The first possible taxing point is not applicable because the restriction on dealing with the Rights will not be lifted at any time and the scheme genuinely restricts the participating director from immediately disposing of the Rights.

The second possible taxing point is the end of the 15 year period starting when the Rights are acquired (subsection 83A-120(6)).

(7)           The third possible taxing point determined under subsection 83A-120(7) is when:

(a)           the participant exercises the right,

(c)           there is no real risk that, under the conditions of the employee share scheme, after exercising the right, the participant will forfeit or lose the beneficial interest in the share (other than by disposing of it), and

(d)           if, at the time the participant acquired the ESS interest, the scheme genuinely restricted them immediately disposing of the beneficial interest in the share if the right is exercised - the scheme no longer so restricts you.

Once the Rights are automatically exercised into Shares, there is no real risk that the participating director will forfeit or lose the Shares (other than by disposing of them).

Under the terms of the Plan Rules, the Shares must not be disposed of until the earliest of:

•                     the nominated Trading Restriction Period ending,

•                     cessation as a director of A Co, or

•                     when there is a change of control event as defined in the Plan Rules.

The scheme no longer restricts the participating director disposing of the Shares when:

•                     the Trading Restriction Period ends (or at the end of a Blackout Period if the Trading Restriction Period ends during that period) when the restrictions on the Shares cease, or

•                     the director ceases to be a director of A Co before the end of the restriction period when the unvested Rights vest on a pro-rata basis and are exercised into Shares without any trading restriction and when all trading restrictions on allocated Shares are lifted, or

•                     there is a change in the control of A Co, when all Restricted Shares vest and all restrictions cease to have effect (unless the Board determines otherwise).

Therefore, subject to subsection 392-5(6) of the TAA, the ESS deferred taxing point occurs at the earliest of the following times:

•                     the end of the 15-year period starting when the Rights are acquired, and

•                     when the Rights are vested and exercised into Shares and all genuine disposal restrictions on the Shares cease to apply.

However, if the ESS interest is disposed of within 30 days of the ESS deferred taxing point determined above, the ESS deferred taxing point will be the time the participant disposes of the interest (subsection 83A-120(3)).

Note, in working out the ESS deferred taxing point for an ESS interest under Division 392 of the TAA, the provider can disregard subsection 83A-120(3) if the provider does not know when or whether the ESS interests are disposed of (subsection 392-5(6) of the TAA).