Private ruling: Employee Share Scheme
Published: May 2012
Ruling period: Year ended 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Do you need to include your assessable discount at the deferred taxing point on options you obtained under an ESS in your 2010/11 income tax return? | A1:  | Q2: Can you treat your ESS options as capital in nature? | A2: 

Relevant facts and circumstances: You acquired options in Company A under an ESS. The options expire on a future date and the exercise price was provided. Your ESS options were granted in two tranches. The first tranche vested during the 2009/10 income year. The second tranche was due to vest during the 2010/11 income year, however due a takeover bid they vested early at the same time as the first tranche. A clause in the ESS plan provided that the ESS options would vest in the event of a takeover bid. You received an ESS statement for the 2010/11 income year from Company A which provided the discount amount at date of vesting.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 83A-10 | Income Tax Assessment Act 1997 Subsection 83A-105(3) | Income Tax Assessment Act 1997 Section 83A-120 | Income Tax Assessment Act 1997 Section 83A-125

Reasons for decision: Summary: The ESS provisions apply where options or shares are provided to employees of a company in relation to their employment; these are known as employee share schemes (ESS). Where you acquire ESS interests that are at a real risk of forfeiture and the scheme meets certain other conditions, the tax on the discount will be deferred until the deferred taxing point occurs. | Detailed Reasoning - Deferred taxing point: If you acquire ESS interests under a tax-deferred scheme, you will be assessed for tax purposes in the year in which the deferred taxing point occurs. The amount assessed will be the market value of the ESS interests at the deferred taxing point, reduced by the cost base of the ESS interests. The deferred taxing point for an option is the earliest of the following times: · seven years after you acquired the right · when you cease the employment in respect of which you acquired the right · when there is no real risk of forfeiting the right and the scheme no longer genuinely restricts disposal of the right · when there is no real risk of forfeiting the right or underlying share, and the scheme no longer genuinely restricts exercise of the right or disposal of the resulting share. In your case, you acquired options in Company A in respect of your employment. Therefore your options were acquired under an ESS. As your ESS options were acquired under a tax-deferred scheme the assessable discount on these ESS options must be included in the income year in which the deferred taxing point occurred. Your deferred taxing point occurred when your ESS options vested (restrictions of disposal ceased), as this was the earliest event to occur in relation to these ESS options. Therefore, you are required to include the discount amount according to your ESS statement in your 2010/11 income tax return. | Detailed Reasoning - Question 2: In most cases, ESS interests are exempt from capital gains tax (CGT) implications until the interest has been taxed under the employee share scheme rules (the primary taxing regime for ESS interests). For an ESS interest for which tax is deferred, the ESS interest (and the share or right that it forms part of) is taken to have been re-acquired immediately after the deferred taxing point. This resets the cost base of the ESS interest to its market value at this time, and resets the acquisition time, which will be relevant to your eligibility for the 50% CGT discount. Once an ESS interest has been taxed under the employee share scheme rules, and the interest is taken to have been acquired (or re-acquired) at its market value, it is then taxed under the CGT regime or other regimes such as the trading stock rules. In your case, the ESS provisions are the primary taxing regime for your ESS interests. There is no discretion to choose to apply CGT provisions to your ESS interests. Therefore, the ESS provisions apply to your ESS options and you cannot choose to treat your ESS interests as capital in nature.

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