Edited version of private advice

Authorisation Number: 1052347125717

Date of advice: 6 January 2025

Ruling

Subject: Employee share scheme

Question 1

Were you granted the stock options under an employee share scheme as defined in subsection 83A-10(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

Yes.

Question 2

Were you granted the stock options under a tax deferral scheme for the purpose of Subdivision 83A-C of the ITAA 1997?

Answer 2

Yes.

Question 3

Will the deferred taxing point in relation to the stock options occur for the purpose of section 83A-120 of the ITAA 1997 when you transfer the Company A shares acquired by exercising them to your Family Trust?

Answer 3

Yes.

This ruling applies for the following periods:

20XX-XX income year

20XX-XX income year

20XX-XX income year

20XX-XX income year

20XX-XX income year

The scheme commenced on:

2 November 20XX

Relevant facts and circumstances

You are employed by Company B which is an Australia private company. They have a contract to provide services to Company A which is a private company registered in another country.

A couple of years ago, you were engaged to provide the services to Company A. The details of the arrangement were confirmed in an e-mail from Company A.

That e-mail noted that a grant of stock options would be provided to you (subject to company policy).

You are not an employee of Company A but your contractual arrangement is quite similar to employment albeit via Company B as the employer of record:

•                     You have a reporting line and manager in Company A and your job tasks, activities and performance are measured by them.

•                     You have a Company A e-mail address, business card, job title, branded work shirts and, access to corporate systems to use for day-to-day work for them.

•                     You represent Company A at conferences, meetings with customers and the like.

•                     You are present and participate in monthly, quarterly and annual company meetings.

•                     You are treated in the same way as an employee or worker of company A, and

•                     You present yourself as an employee of Company A.

About four months after beginning work, you were granted the stock options by Company A in relation to the services you provide to them.

Each stock option allows you to acquire an ordinary Company A share at a specified exercise price which was the fair market value of Company A shares on the grant date.

The stock options only become exercisable if you are still rendering services to Company A or an affiliate on each vesting date. The vesting schedule is that 25% of the stock options vested about a year later and an additional 6.25% every three months later.

By Section 9 of the Stock Option Plan, the stock options expire on the tenth anniversary of the commencement date. By Section 10.1, the expiry can be brought forward due to the end of 'employment'.

Company A is not a share trading and investment company of the type mentioned in subsection 83A-45(3) of the ITAA 1997.

You do not hold a beneficial interest in more than 10% of the shares in Company A. Neither are you in a position to cast or control the casting of more than 10% of the shares that might be cast at a general meeting of Company A.

By Section 15.1 of the Stock Option Plan, options may not be sold, assigned, transferred, pledged, hypothecated or otherwise disposed of, except by will or the laws of descent.

By Section 15.2 of the Stock Option Plan, shares are subject to similar disposal restrictions prior to an initial public offer (IPO) or specific authorisation by the Administrator.

You have received approval from Company A that you can immediately transfer the shares you acquire due to exercising the stock options to permitted transferees which include your Family Trust.

The first batch of vested stock options were exercised and the resulting shares transferred to your Family Trust recently.

This transfer of Company A shares to your Family Trust occurred within 30 days of the date you exercised the stock options.

During the period of this ruling:

•                     You will exercise further stock options during the period of this ruling (this is expected to occur in about a year's time)

•                     You will exercise the final stock options during the period of the ruling (this is expected to occur about a year later)

•                     In both instances, you will then transfer the Company A shares you acquire by exercising those stock options to your Family Trust.

The transfer of Company A shares to your Family Trust will occur within 30 days of the date you exercise the relevant stock options.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 section 83A-10

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 (1997 Act) Regulations 2021 Division 83A

Reasons for decision

Question 1

Summary

You were granted the stock options under an employee share scheme as defined in subsection 83A-10(2) of the Income Tax Assessment Act 1997 (ITAA 1997).

Detailed reasoning

ESS interest in a company is defined by subsection 83A-10(1) of the ITAA 1997 to include a beneficial interest in a right to acquire a beneficial interest in a share in the company.

The stock options that were granted to you provide you with the right to exercise them and acquire ordinary shares in Company A. The stock options are ESS interests in Company A.

An employee share scheme is defined by subsection 83A-10(2) of the ITAA 1997 as a scheme under which ESS interests in a company are provided to employees of the company (or a subsidiary of the company) in relation to the employee's employment.

The reference to employment mentioned above is extended by section 83A-325 of the ITAA 1997 to include certain 'employment-like' activities of individuals such as the provision of services personally other than as an employee.

That means that an individual who provides services to another entity under a contract or an agreement and who is partly or fully rewarded for those services with shares, stapled securities or rights to acquire them from that entity, is assessable on the value of those benefits as ESS interests granted to them under an employee share scheme.

These statements apply to you in the following manner:

•                     The stock options are ESS interests in Company A because they provide you with the right to acquire shares in Company A.

•                     The grant of the stock options is under an employee share scheme because they are a form of remuneration that you are receiving in return for the services you are providing to Company A.

•                     It does not matter that you are not directly employed by Company A or a subsidiary of Company A. It is sufficient that you are providing the services to Company A as an individual.

Question 2

Summary

You were granted the stock options under a tax deferral scheme for the purpose of Subdivision 83A-C of the ITAA 1997.

Detailed reasoning

The grant of ESS interests under an employee share scheme only has 'remuneration value' if the ESS interests are granted to the employee at a discount to their market value. This is a requirement of subsection 83A-20(1) of the ITAA 1997 if Subdivision 83A-B (about taxed upfront schemes) is to apply to the grant.

Section 83A-105 of the ITAA 1997 applies Subdivision 83A-C (about tax deferral schemes) to the ESS interests instead of Subdivision 83A-B if specific conditions are satisfied.

The relevant conditions for concluding that you were granted the stock options under a tax deferral scheme are that:

•                     The stock options are ESS interests

•                     You were granted the stock options under an employee share scheme

•                     You were granted the stock options at a discount to their market value

•                     The grant of the stock options was not eligible for the start-up concession

•                     The relevant general ESS concession conditions are satisfied

•                     The specific tax deferral scheme concession conditions are satisfied

For the reasons outlined above, the stock options are ESS interests in Company A and you were granted them under an employee share scheme.

The stock options are granted at a discount to their market value if their market value is greater than $nil because you did not pay anything to acquire them.

The market value of options is generally higher than the difference between the market value of shares that would be acquired by exercising the options and the exercise price that is payable. Division 83A of the Income Tax Assessment (1997 Act) Regulations 2021 provides the mechanism that is generally used to work out the market value of unlisted rights to acquire shares (including options). It would allocate a value equal to 9.1% of the exercise price if that was also the market value of shares to be acquired by exercising the options and the expiry period for the options was between nine and ten years (on the calculation day).

You have not suggested that the Stock Option Plan operated by Company A is eligible for the start-up concession in section 83A-33 of the ITAA 1997.

The relevant general ESS concession conditions in subsections 83A-45(1), (2), (3) and 6) of the ITAA 1997 are that:

•                     You must be in the employment relationship when the stock options were granted (and not be a prospective or past employee)

•                     You must acquire ordinary shares in Company A if you exercise the stock options

•                     Company A must not be a share trading and investment company of the type mentioned in subsection 83A-45(3)

•                     You must not hold a beneficial interest in more than 10% of the shares in Company A

•                     You must not be in a position to cast or control the casting of more than 10% of the maximum number of shares that might be cast at a general meeting of Company A

The specific tax deferral scheme concession conditions for the stock options as rights to acquire shares in Company A in subsections 83A-105(3) and (6) of the ITAA 1997 are that either:

•                     The stock options are at a real risk of forfeiture - that means there is a real risk that you will forfeit or lose them other than by disposing of them, exercising them or allowing them to expire

•                     The shares you may acquire by exercising the stock options are at a real risk of forfeiture - that means there is a real risk that you will forfeit or lose them other than by disposing of them, or

•                     The stock options are subject to genuine disposal restrictions and the governing rules expressly state that it is a deferral scheme for Australian income tax purposes

The conditions for concluding that you were granted the stock options under a tax deferral scheme are satisfied because:

•                     The stock options are ESS interests

•                     You were granted the stock options under an employee share scheme

•                     You were granted the stock options at a discount to their market value

•                     The grant of the stock options was not eligible for the start-up concession

•                     All of the relevant general ESS concession conditions are satisfied

•                     At least one of the specific tax deferral scheme concession conditions are satisfied

Consequently, the amount of the discount is calculated and assessable to you at the deferred taxing point and not the grant date.

Question 3

Summary

The deferred taxing point in relation to the stock options occurs for the purpose of section 83A-120 of the ITAA 1997 when you transfer the Company A shares acquired by exercising them to your Family Trust.

Detailed reasoning

Ordinarily, the deferred taxing point is defined by subsection 83A-120(2) of the ITAA 1997 as the earliest or first of the possible deferred taxing points in subsections (4), (6) and (7).

These possible deferred taxing points are:

•                     The earliest time that the stock options are not subject to a real risk of forfeiture or genuine disposal restrictions

•                     15 years from the date of grant (the maximum deferral period)

•                     After the stock options are exercised, the earliest time that the shares acquired by exercising them cease to be subject to a real risk of forfeiture or genuine disposal restrictions

The deferred taxing point is adjusted to the disposal date by subsection 83A-120(3) of the ITAA 1997 if that disposal occurs within 30 days of the times mentioned above.

The first possible deferred taxing point in subsection 83A-120(4) of the ITAA 1997 has not been satisfied because the stock options are subject to genuine disposal restrictions as set out in Section 15.1 of the Stock Option Plan. Effectively, you cannot dispose of the stock options other than by dying.

The second possible deferred taxing point in subsection 83A-120(6) of the ITAA 1997 will not be satisfied for more than a decade (15 years from the grant date).

The third possible deferred taxing point in subsection 83A-120(7) of the ITAA 1997 happened when you exercised the first batch of stock options because you were already authorised to dispose of the Company A shares you acquired by exercising the stock options to your Family Trust. This also means that there those Company A shares were not at a real risk of forfeiture.

The third possible deferred taxing point in subsection 83A-120(7) of the ITAA 1997 will happen to the remaining stock options when you exercise them for the same reason - you are already authorised to dispose of the Company A shares you acquire by exercising those stock options to your Family Trust.

The first of the possible deferred taxing points to occur will be the third one when you exercise the stock options.

However, in each instance, there will be a disposal of the Company A shares acquired by exercising the stock options with 30 days of the exercise date. Therefore, that disposal date will be the deferred taxing point in relation to the stock options.