ATO Interpretative Decision

ATO ID 2008/121 (Withdrawn)

Income Tax

Employee share scheme: voluntary undertaking not to dispose of a share
FOI status: may be released
  • This ATO ID is withdrawn as Division 13A of the Income Tax Assessment Act 1936 (ITAA 1936) (about employee share schemes) was repealed by Act No. 133 of 2009 and was replaced by Division 83A of the Income Tax Assessment Act 1997 (ITAA 1997) (which applies in full to 'ESS interests' acquired on or after 1 July 2009). Moreover, the Income Tax (Transitional Provisions) Act 1997 extends the application of Division 83A to ESS interests acquired before 1 July 2009 in certain cases on which tax was deferred beyond that date under the former Division 13A.
    This document has changed over time. View its history.

CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

Issue

Where a taxpayer acquires an option under an employee share scheme (ESS), and prior to exercising the option and acquiring a share, the taxpayer gives a voluntary undertaking to their employer to not dispose of the share and no mechanism is put in place to prevent them disposing of the share, will the voluntary undertaking constitute 'a restriction preventing the taxpayer from disposing of a share' for the purposes of paragraph 139CB(1)(c) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Decision

No. A voluntary undertaking not to dispose of the share without a mechanism to prevent the disposal, will not constitute 'a restriction preventing the taxpayer from disposing of a share' for the purposes of paragraph 139CB(1)(c) of the ITAA 1936.

Facts

A taxpayer is granted an option to acquire a share under an ESS.

The option is a qualifying right for the purposes of Division 13A of Part III (Division 13A) of the ITAA 1936.

Before the option is exercised the taxpayer advises their employer in writing that they voluntarily undertake to not dispose of any share acquired on exercise of the option before the earlier of a number of specified events.

The option is exercised and the taxpayer acquires a share.

On acquisition of the share, there is no mechanism in place to prevent the disposal of the share.

Reasons for Decision

The expression 'a restriction preventing the taxpayer from disposing of a share' used in paragraph 139CB(1)(c) of Division 13A of the ITAA 1936 is not defined. Therefore it should take on its ordinary meaning having regard to its context and the underlying purpose or object of Division 13A.

The Commissioner considers 'a restriction preventing a taxpayer from disposing of a share' to ordinarily be a restriction applied by the taxpayer's employer or an agent or associate of the employer, that prevents the taxpayer from disposing of the share.

Such a restriction will generally arise under the terms of a formal ESS or under the terms of an employment contract and the mechanism for effecting the restriction may include a holding lock on the share put in place by a share registry, or the holding of the share by a trustee.

Therefore, where a taxpayer advises their employer that they will not dispose of any share acquired on exercise of an option, and no mechanism is put in place by the employer, or an agent or associate of the employer to prevent the taxpayer from disposing of the share, the Commissioner does not accept that the voluntarily undertaking by itself, will constitute 'a restriction preventing the taxpayer from disposing of a share' for the purposes of paragraph 139CB(1)(c) of the ITAA 1936.

Date of decision:  4 September 2008

Year of income:  Year ended 30 June 2005

Legislative References:
Income Tax Assessment Act 1936
   Division 13A of Part III
   paragraph 139CB(1)(c)

Keywords
Employee share schemes & options
Qualifying rights

Business Line:  Private Groups and High Wealth Individuals

Date of publication:  12 September 2008

ISSN: 1445-2782

history
  Date: Version:
  4 September 2008 Original statement
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