Private ruling: Income tax - assessable income - employee share schemes - taxation of discounts - deferred
Date of advice: 10 September 2020
Published: October 2020
Ruling period: Year ended 30 June 20XX to 30 June 20YY
Date scheme commenced: The time that the Proposed Amendments are made.

Ruling: Q1: When Individual A acquires Units under the Employee Share Plan after the making of the Proposed Amendments, and assuming the ESS deferred taxing point is not the 15th anniversary of the date of acquisition under subsection 83A-115(6) of the Income Tax Assessment Act 1997 (ITAA 1997) nor in accordance with the 30-day rule in subsection 83A-115(3) of the ITAA 1997 and that an Exit Event has not occurred, will the ESS deferred taxing point under subsections 83A-115(4) and (5) of the ITAA 1997 be the same time ? | A1: Yes | Q2: What amount will be included in the assessable income of Individual A at the ESS deferred taxing point for the Unit in the event of a Disqualification Discount applying? | A2: The amount that will be included in the assessable income of Individual A at the ESS deferred taxing point, when a Disqualification Discount applies, for each Remaining Unit will be the market value of the Share referrable to that Remaining Unit reduced by the cost base (if any) of the Unit. | Q3: If the Proposed Amendments were to apply to Units acquired by Individual A before the Proposed Amendments were made, would the Proposed Amendments have the effect of altering when the ESS deferred taxing point would occur for the Units? | A3: No, the ESS deferred taxing point calculated with reference to subsection 83A-115(4) to (6) will be the earlier of the time when there is no longer a real risk of forfeiture of the Units or the time when Individual A ceases employment unless Individual A disposes of the interest within 30 days of that time and subsection 83A-115(3) applies.

Relevant facts and circumstances: This scheme description incorporates, and should be read with, the Employee Share Plan Trust Deed (Trust Deed) with the Proposed Amendments provided by the Applicant. The Employer is an Australian based company group carrying on a business. The Employer has had in place, the Employee Share Plan (the Plan) as a mechanism for rewarding, retaining and motivating its employees. The Employer introduced the Plan for the following reasons: · to provide a mechanism for rewarding staff for their loyalty and effort in a structured, equitable and transparent manner · to provide benefits for existing employees and attract new employees · to assist to engender responsibility for the performance of its business throughout its employees and provide a mechanism that rewards staff for our collective and individual contributions. The Employer operates the Plan through a trust known as the Employee Share Plan Pty Ltd as trustee for the Employee Share Plan Trust (the Trust). The Trust is an employee share trust as defined in subsection 130-85(4) of the ITAA 1997. The Trustee Company is owned by the majority owner of the Employer who is also one of the two directors. The two directors of the Trustee Company are the same as the two directors of the Employer. The Trustee is now proposing to make amendments (Proposed Amendments) to the Trust Deed using the power contained in the Trust Deed. The Proposed Amendments aim to 'tidy up' the original Trust Deed where required but relevantly for the purposes of this Ruling seek to make substantive changes to the redemption clause in the Trust Deed relating to the redemption entitlement of Participants (as defined) in the Plan. Individual A, an employee of the Employer, is a Participant in the Plan and they expects to receive an invitation to further increase participation in the Plan following the making of the Proposed Amendments. Individual A has previously received a ruling relating to the Plan before the proposed amendments. Description of the Plan and terms of the Trust Deed The Trust is used to acquire fully paid ordinary shares in the capital of the Employer (Shares) for employees pursuant to the Plan. The Trust provides an arm's-length vehicle through which Shares can be acquired and held on behalf of employees providing the liquidity of employee held Shares in a simple flexible manner compared to the Employer buying back Shares from employees. In effect, this aspect allows the Employer to satisfy corporate law requirements relating to companies dealing in their own shares. The Trust provides the following benefits to the Employer: · Allows key shareholders to keep control over company ownership. · Registration of shares in the Trustee's name provides control over identity of shareholders, preventing a sale to unrelated persons. · If the Employer is sold, it is easier to "mop-up" employee shareholders. · Enables the Disqualification Event and Redemption and Disqualification Discount provisions (as defined) to be enforced in a simple manner through the Trust. An initial contribution to the Trust was made at commencement of the Plan. Further annual contributions are made to the Trust by the Employer in accordance with a formula established by the Employer. The Trustee, at the direction of the Employer, uses any money contributed by the Employer and any residual amounts to purchase Shares from the existing shareholders of the Employer, although a small amount is retained to provide for the administration of the Plan. The Trust Deed allows for the Employer to direct the Trustee to subscribe for Shares, but it is not the Employer's current intention for the Trustee to use this method to acquire Shares. Shares will be held by the Trustee as Unallocated Shares until such Shares are allocated to Eligible Employees who become Participants in the Plan. The Employer will be entitled under the Trust Deed to nominate and invite Eligible Employees to participate in the Plan. The Employer does not have any right to the income or capital of the Trust. Eligibility to participate in the Plan is based upon an independently assessed set of criteria. To be eligible to benefit from any contributions subsequent to the initial contribution (and any residual amounts of capital after the application of Disqualifying Events or Disqualifying Discounts) an employee must have been continuously employed as a permanent employee of the Employer for two years excluding any breaks in employment (e.g. leave without pay). This includes full time and part time permanent employees. A clause of the Deed states, that notwithstanding anything else express or implied in the Deed, the Plan must be available to at least seventy-five (75) percent of the permanent employees of the Employer who have completed as least 3 years of service (whether continuous or noncontinuous) with your employer. The beneficial interest of the Shares in the Trust Fund is divided into Units. The Trust Deed is expressly made with the intention that the Units in the Trust Fund confer to the Participants a beneficial interest in the Shares in the Employer. Subject to a demonstrated commitment to the Employer (determined by the exercise of the Directors discretion) and meeting the expectations of their current role (demonstrated by having no significant performance issues), the Employer will invite Eligible Employees to participate in the Plan by owning Units. The invitation will include the terms and conditions upon which the Units will be issued. Following receipt of an invitation, an Eligible Employee who wishes to participate in the Plan will return the completed application form. Upon acceptance of the application by the Employer, Eligible Employees become Participants in the Plan. The Employer will then instruct the Trustee to allocate a specific number of Units to the Eligible Employee and to designate one Share to each Unit (Allocated Share). The Trustee shall ensure such designation is recorded in the books and records of the Trust. Eligible Employees may make a contribution toward the acquisition of a Unit. The Units provided to the Participants are substantially the same rights in respect of the Shares which are allocated to the Units as if the Participants were the legal owners of the Shares. Subject to the provisions of the Trust Deed, a Unitentitles the Participants to: · receive the income deriving from the Allocated Shares including dividends declared by the Directors at their discretion in respect of the Shares · to the extent that voting rights are attached to the Shares, direct the Trustee on how it should be exercised, and · receive the Employee Redemption Amount on redemption. The Units may be issued to an associate of an Eligible Employee (and the associate will be a Participant under the Plan). The number of Units issued to a Participant will be determined by the Trustee with reference to the following factors: · length of Service (pro rata for permanent part time) ( 20-40 % ) and excludes any breaks in employment (i.e. leave without pay) but includes all paid leave periods in accordance with standard leave entitlements for employees · role/responsibility ( 20-40 % ) - reflected by consideration of current role, with key metric including current base salary level (FTE), and · performance ( 20-40 % ). No Eligible Employee may acquire Units, by way of an Invitation or otherwise, if, immediately after the acquisition of those Units, the Eligible Employee would directly or indirectly hold or control a legal or beneficial interest in 10% or more of the issued capital of the Employer (including the voting rights that relate to those shares). The Trustee shall keep and maintain an up-to-date register of all Unit Holders. Units cannot be transferred or assigned or otherwise dealt with in favour of any person nor can any equitable, contingent, future or partial interest or other security interest be created in a Unit. Where the Shares are allocated to a particular Participant, any dividends that the Trustee receives as the result of holding those Shares in the Trust will flow-through to the relevant Participant. Where Shares remain unallocated in the Trust any dividends that the Trustee receives as the result of holding those Shares in the Trust will be retained as part of the capital of the Trust. Clause X provides that if a Disqualifying Event occurs, the relevant Participant will forfeit any right or interest in the Units acquired for the benefit of the Participant under the Plan. "Disqualifying Event" means: · the employment of the relevant Participant or Eligible Employee ceasing because of Termination or Termination for Cause: - 'Termination' means the termination of employment of the relevant Participant or Eligible Employee by the Employer other than Special Circumstances, Resignation and Termination for Cause'. - 'Termination for Cause' means termination of the employment of the relevant Participant or Eligible Employee without notice by the Employer due to fraud, gross misconduct and other similarly serious events. - 'Resignation' means the voluntary termination of employment by the Participant, or if the participant is an Associate, the relevant Eligible Employee. - "Special Circumstance"means the cessation of employment due to Redundancy, where the Eligible Employee dies, or where the employment relationship ends because of Retirement, including for reasons of trauma or total and permanent disability; - Retirement means: retirement at 65 years or older; retirement due to total mental or physical disability which prevents the Eligible Employee from being employed at all, as certified by a doctor acceptable to the Employer and Trustee; and retirement due to extenuating circumstances as determined and agreed by the majority shareholders of the Employer. · the relevant Participant or Eligible Employee becoming bankrupt or entering a composition or an arrangement with his creditors or taking advantage of any statute for the relief of insolvent debtors; · the relevant Participant becoming of unsound mind or where their estate is liable to be dealt with under any law relating to mental health; · the Participant attempting to transfer or assign or create an interest in a Unit; · any other events nominated by the Employer; · for the avoidance of doubt, Disqualifying Event does not mean cessation of employment due to the occurrence of Special Circumstances. Redemption clause prior to the Proposed Amendments - Clause Y Prior to the Proposed Amendments, the redemption clause provided that, subject to clause X, the Trustee may by resolution redeem all or a specified number of Units registered in a Participant's name on the happening of any of the following events: · upon the Trustee's determination to redeem any or all at the Trustee's absolute unfettered discretion · notification by the Employer to the Trustee that the employment of the Participant (or the relevant Eligible Employee) has ceased because of Resignation or Special Circumstances, and · receipt by the Trustee of a request in writing from the Participant to cancel one or more Units provided that request is: - made while the Participant (or their associate) is an Employee, and - made with the written approval of the Board. Subject to the terms of the Trust Deed the relevant Disqualification Discounts (if any) as set out below apply to the Units redeemed, rounded up to the nearest whole number. The Remaining Units are defined as the Units held by a Participant after the application of the Disqualification Discounts. The Participant will be entitled to the rights and interests in the Remaining Units (i.e. the interest in the Allocated Shares referable to those Remaining Units), and will forfeit any rights or interests in the Units that the Participant would, but for the application of the Disqualification Discounts, have been entitled to. However, no Disqualification Discounts are applicable to any Unit whose issue has been funded by the Participant (or the relevant Eligible Employee) entirely by the contribution of funds to the Trustee by the Eligible Employee, or upon the occurrence of Special Circumstances. Disqualification Discounts are defined as follows: "Disqualification Discounts" means the percentage of Units a Participant is entitled to redeem as set out in Item 2 of the table below, determined by reference to the duration each individual Unit is held for, but provided that if the relevant Eligible Employee has completed 10 years of service when they (or their associate) first become a Participant, then Item 3 of the table will apply as the Disqualification Discounts: Held individual Units for Entitlement Percentage (Item 2) Entitlement Percentage (Item 3) 1 Year 10% 30% 2 Years 20% 35% 3 Years 30% 40% 4 Years 40% 45% 5 Years 50% 50% 6 Years 60% 60% 7 Years 70% 70% 8 Years 80% 80% 9 Years 90% 90% 10 Years or more 100% 100% The Participant who holds Remaining Units shall be entitled to direct the Trustee: to sell the Allocated Shares and receive from the Trustee the cash value of the Shares sold net of any selling costs; or to transfer to them the Allocated Shares. Redemption clauses after the proposed amendments When the Proposed Amendments are made the redemption clause will provide that, subject to clause X, a Participant is only entitled to have their Units redeemed on the first to occur of the following events (or otherwise direct the Trustee to transfer the relevant Allocated Shares in accordance with Clause Y.Y): (a) the Participant or, if the Participant is an Associate, the relevant Eligible Employee, ceases to be employed by or otherwise providing services to the Company or any Associated Company (this only arises if the cessation of employment or provision of services does not give rise to the forfeiture of Units under clauses X); (b) the 15th anniversary of the acquisition of those Units by the Participant; and (c) an Exit Event other than a Share Sale (noting that in the event of a Share Sale, the relevant Participant or Eligible Employee is entitled to the cash value of the Allocated Shares referable to their Units sold, net of any costs in relation to the selling of those Allocated Shares) An Exit Event means: (a) a Listing - an initial public offering of an IPO Entity (as defined) to the official list of ASX Limited or another recognised stock exchange; (b) a Business Sale - a sale to a third party purchaser of all (or substantially all) of the assets and business undertaking of the Group (including by way of a sale of shares of the Company's directly or indirectly owned Subsidiaries) provided that no sale or transfer undertaken to effect a corporate reorganisation of the Group will constitute a Business Sale; or (c) a Share Sale - the sale by Shareholders (in one transaction or a series of connected transactions) to a third party purchaser of all of the issued Shares provided that no sale or transfer undertaken to effect a corporate reorganisation of the Group will constitute a Share Sale. Upon redemption of such Unit the relevant Disqualification Discounts (if any) as set out below will apply to the Units redeemed, rounded up to the nearest whole number. 'Remaining Units' means the Units held by a Participant after the application of the Disqualification Discounts (if any). The Participant will be entitled to the rights and interests in the Remaining Units, and will forfeit any rights or interests in the Units that the Participant would, but for the application of the Disqualification Discounts, have been entitled to. However, no Disqualifying Discounts are applicable to any Units: whose issue was funded by the Participant wholly by way of Employee's Contribution; or in the event that there is an Exit Event other than a Share Sale (that is there is accelerated vesting where the relevant redemption trigger is an Exit Event other that a Share Sale). Further, where an Exit Event that is a Share Sale occurs, then the Participant is entitled to the cash value of the Allocated Shares referable to their Units sold ignoring any Disqualification Discount that would otherwise arise in the event of a redemption at that time and net of any costs in relation to the sale of those Allocated Shares (that is, there is also accelerated vesting where the relevant redemption trigger is a an Exit Event by way of Share Sale). The holder of the Remaining Units in the event of cessation of employment or provision of services or in the event that the redemption trigger is the 15 th anniversary of the issue date of the relevant Units shall be entitled to direct the Trustee to either: (a) sell the Allocated Shares referable to the Remaining Units or Units held by the Trustee on behalf of the Participant and receive from the Trustee the Employee Redemption Amount (the cash value of the Allocated shares referable to the Remaining Units sold, net of any costs in relation to the selling of those Allocated Shares); or (b) transfer the Allocated Shares referable to the Remaining Units or Units held by the Trustee to the Eligible Employee or the Participant. Disqualification Discounts are defined as follows: "Disqualification Discount" means the percentage of Units a Participant is not entitled to redeem as outlined in Item 1 of the table below results in the Entitlement Percentage as set out in Item 1 of the table below, determined by reference to the duration each individual Unit is held for, but provided that if the relevant Employee has completed 10 years of service when they first become an Eligible Employee, then the lower Item 2 Disqualification Discount applies resulting in the higher Entitlement Percentage in Item 2 of the table below: Held individual Units for Entitlement Percentage (Item 1) Item 1 Disqualification Discount Entitlement Percentage (Item 2) Item 2 Disqualification Discount 1 Year 10% 90% 30% 70% 2 Years 20% 80% 35% 65% 3 Years 30% 70% 40% 60% 4 Years 40% 60% 45% 55% 5 Years 50% 50% 50% 50% 6 Years 60% 40% 60% 40% 7 Years 70% 30% 70% 30% 8 Years 80% 20% 80% 20% 9 Years 90% 10% 90% 10% 10 Years or more 100% 0% 100% 0% Entitlement Percentage is defined as follows: "Entitlement Percentage" means the percentage of the Units of a Participant to which they are entitled in the event of a redemption under this clause 14 and as outlined in the table above and for the avoidance of doubt, in the event of a redemption under this clause 14 the total number of Units held by a Participant whose Units are being redeemed are reduced by the Disqualification Discount (if any) giving rise to the Entitlement Percentage which is multiplied by the total number of Units of the Participant being redeemed so as to determine the number of Remaining Units. Assumption(s) All relevant approvals required under the Trust Deed to make the Proposed Amendments will be obtained. Individual A will acquire Units under the Plan after the Proposed Amendments for no consideration. Immediately after Individual A acquires the Units they will not hold a beneficial interest in more than 10% of the Shares in the Employer and will not be in a position 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 the company (taking into account and including any Shares and any voting rights that they would have by exercising any rights they have over Shares and the holdings of their associates). An Exit Event is not anticipated at the time of acquisition of the Units.


Reasons for decision: Summary: All legislative references are to the Income Tax Assessment Act 1997 unless otherwise stated. | Detailed Reasoning - Issue 1: ESS deferred taxing point | Detailed Reasoning - Question 1: When Individual A acquires Units under the Employee Share Plan after the making of the Proposed Amendments, and assuming the deferred taxing point is not the 15th anniversary of the grant date under subsection 83A-115(6) of the ITAA 1997 nor in accordance with the 30-day rule in subsection 83A-115(3) of the ITAA 1997 and that an Exit Event has not occurred, the deferred taxing point under subsections 83A-115(4) and (5) of the ITAA 1997 will be the same time. | Detailed Reasoning - Does Division 83A apply to Units acquired after the Proposed Amendments?: Division 83A applies to an ESS interest if you acquire the interest under an employee share scheme at a discount. Section 83A-1 states that your assessable income includes discounts on shares, rights and stapled securities you (or your associate) acquire under an employee share scheme. Subsection 83A-10(1) states that an ESS interest, in a company, is a beneficial interest in: a share in the company; or a right to acquire a beneficial interest in a share in the company. Subsection 83A-10(2) states that an employee share scheme is a scheme under which ESS interests in a company are provided to employees or associates of employees, (including past or prospective employees) of the company; or subsidiaries of the company; in relation to the employees' employment. The combined effect of section 83A-20 and paragraph 83A-105(1)(a) is that Division 83A (and, in particular, either Subdivision 83A-B or 83A-C) will apply to an ESS interest if you acquire the interest under an employee share scheme and at a discount. Unless Subdivision 83A-C applies to the shares, Subdivision 83A-B will apply and the shares will be subject to tax on acquisition. | Detailed Reasoning - Application to your circumstances: When Individual A accepts an invitation to acquire Units in the Trust for no consideration or at a discount they will acquires ESS interests. It is accepted that the Units will give Individual A, a beneficial interest in the underlying Share that is referrable to the Unit under the terms of the Trust Deed for the purposes of section 83A-10(1). As the value of the Units are considered to be equal to the value of the underlying Shares and Individual A will not pay consideration for the Units, Individual A will have acquired the ESS interests at a discount. The Units in the Trust are provided to Individual A as an incentive from his Employer and as such are clearly acquired by Individual A in relation to his employment. Therefore Division 83A will apply to the acquisition of Units by Individual A. However, it should be noted that where Individual A acquires Units in the Trust and pays market value consideration for such Units neither of the operative Subdivisions of Division 83A will apply to the acquisition of such Units. Although the interests acquired meet the definition of ESS interests in section 83A-10 and such interests are arguably acquired in relation to employment, Division 83A will only apply where such interests are acquired at a discount. Therefore, in those circumstances Division 83A will not apply to any Units acquired by Individual A at market value. | Detailed Reasoning - Does Subdivision 83A-C apply?: Where Subdivision 83A-C applies (the conditions specified in that subdivision are met) the income year in which the shares are subject to tax is deferred. Under subsection 83A-110(1), a taxpayer's assessable income for the year in which the ESS deferred taxing point occurs includes the market value of the ESS interest at the ESS deferred taxing point reduced by the cost base of the interest. Section 83A-105 relevantly provides that Subdivision 83A-C applies, and Subdivision 83A-B does not apply, to an ESS interest that is a beneficial interest in a share if all of the following conditions are satisfied: · Subdivision 83A-B would apart from this section apply to the interest (as discussed above regarding Units acquired at a discount). · Paragraphs (aa) and (ab) of subsection 83A-105(1) are satisfied. · When the taxpayer acquires the interest they are employed by the company or a subsidiary of the company (subsection 83A-45(1)). · When the taxpayer acquires the interest all the interests available for acquisition under the employee share scheme relate to ordinary shares (subsection 83A-45(2)). · When the taxpayer acquires the interest the predominant business of the company is not the acquisition, sale or holding of shares, securities or other investments (subsection 83A-45(3). · Immediately after the taxpayer acquires the interest they do not hold a beneficial interest in more than 10% of the shares in the company and are not in a position 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 the company (Subsection 83A-45(6)), taking into account and including any shares and any voting rights that they would have by exercising any rights they have over shares (subsection 83A-45(7)) and the holdings of their associates (83A-305(2)). · At the time the taxpayer acquired the interest at least 75% of the permanent employees of their employer who have completed at least 3 years of service (whether continuous or non-continuous) with the employer and who are Australian residents are, or at some earlier time had been, entitled to acquire: - ESS interests under the scheme; or - ESS interests in the employer; or a holding company of the employer; under another employee share scheme (subsection 83A-105(2)). · When the employee acquires the interest there is a real risk that under the conditions of the scheme they will forfeit or lose the interest other than by disposing of it (subsection 83A-105(3)). | Detailed Reasoning - Real Risk of Forfeiture: The Explanatory Memorandum to the Tax Laws Amendment (2009 Budget Measures No.2) Bill 2009 (EM) which inserted Division 83A, explains the real risk of forfeiture test at paragraph 1.156 as follows: 'The 'real risk of forfeiture test' does not require employers to provide schemes in which their employee share scheme benefits are at a significant or substantial risk of being lost. However, real is regarded as something more than a mere possibility. Something is not a real risk if a reasonable person would disregard the risk as highly unlikely to occur or as nothing more than a rare eventuality or possibility. ' It is further explained at paragraph 1.158 of the Explanatory Memorandum that the 'real risk of forfeiture' test is intended to provide for deferral of tax when there is a real alignment of interests between the employee and employer, through the employee's benefits being at risk. Real risk of forfeiture in a scheme may include conditions where retention of the ESS interests is subject to performance hurdles or a minimum term of employment. ATO Interpretative Decision ATO ID 2010/61 Income tax: Employee share scheme: real risk of forfeiture-minimum term of employment and good leaver provisions provides the Commissioner's view of when ESS interests that are rights will be considered to be at a real risk of forfeiture. The Commissioner's view espoused in the ATO ID would apply equally where the test is applied to shares. When an employee acquires rights under an employee share scheme, the Commissioner considers that there is a real risk of forfeiture if, under the conditions of the scheme, the employee will forfeit or lose the rights if they cease employment before the vesting date of the rights where that date is 12 months or more from the date the rights were granted. It states: 'In considering whether a condition in a scheme imposes a real risk of forfeiture, regard should be had to whether a reasonable person would consider that there is a genuine connection between the forfeiture condition and aligning the interests of the employee and employer. If the risk of forfeiture is over a very short period of time to gain access to a relatively long period of deferral the risk will not be considered real.' Where a scheme contains good leaver conditions that allow ESS interests to be retained for example, in the event of death, invalidity or bona fide redundancy, the Commissioner accepts that the ESS interests are at a real risk of forfeiture. The Commissioner will also accept there is a real risk of forfeiture despite an early vesting condition if the circumstances when early vesting may occur is limited to circumstances beyond the taxpayers control e.g. on a takeover, sale or liquidation of the employer company, there is no contrivance and employees do not routinely receive their shares (see example 1.10 in the EM). There is no real risk of forfeiture where a scheme simply includes a condition which: · restricts an employee from disposing of an ESS interest for a specified time · allows an employee to request that the ESS interest be forfeited · provides for an employee to forfeit an ESS interest if they are dismissed for fraud or gross misconduct. | Detailed Reasoning - Application to your circumstances: Paragraphs (aa) and (ab) of subsection 83A-105(1) are satisfied in relation to the ESS interests. Individual A is a current employee of the Employer and so the condition in subsection 83A-45(1) is met. Subsection 83A-45(2) applies as only beneficial interests in ordinary shares of the Employer will be acquired under the Plan. Subsection 83A-45(3) applies because the Employer does not have a predominant business of the acquisition, holding or sale of shares. Subsection 83A-45(6) applies because the terms of the Trust are such that 'no Eligible Employee may acquire Units, by way of an Invitation or otherwise, if, immediately after the acquisition of those Units, the Eligible Employee would directly or indirectly hold or control a legal or beneficial interest in 10% or more of the issued capital of the Employer (including the voting rights that relate to those shares)' and it is assumed that immediately after Individual A acquires the Units they will not hold a beneficial interest in more than 10% of the shares in the Employer and will not be in a position 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 the company (taking into account and including any shares and any voting rights that they would have by exercising any rights they have over shares and the holdings of their associates). The Trust Deed states that notwithstanding anything else express or implied in the Deed, the Plan must be available to at least seventy-five (75) percent of the permanent employees of the Employer who have completed as least 3 years of service (whether continuous or noncontinuous) with the Employer. Therefore, the Commissioner accepts the condition in subsection 83A-105(2) is met. Under the terms of the Trust Deed (as it is proposed to be amended) a Participant can only redeem their Units on the first to occur of: when they (or the relevant employee) ceases employment with the Employer (or their Associated Company), the 15 th anniversary of the acquisition of the Units; and upon an Exit Event. Upon redemption the Units (except those where the employee acquired Units for market value) are subject to the Disqualifying Discounts. These Disqualifying Discounts effectively operate as an employment vesting condition. If the employee has ceased employment prior to the expiry of 12 months the employee will not be entitled to any Remaining Units and will forfeit their Units. Thus, employee Participants only become entitled to have their Units vest at a minimum after satisfying the employment condition for one year. Therefore, the Commissioner accepts that all such Units, and therefore, the underlying Shares are subject to a real risk of forfeiture for the purposes of subsection 83A-105(3). For the avoidance of doubt, the Commissioner considers that if the employee has remained employed for one year since acquisition of the Units, then 10% of their Units will have vested (or 30% in the case of the higher Entitlement Percentage) and the underlying Shares are no longer subject to a real risk of forfeiture (and each subsequent year that the employee remains employed will result in an increased amount of Units (and Shares) vesting). We do not consider that clause X of the Trust Deed gives rise to a real risk of forfeiture of the Units because a Participant can retain their beneficial interest in the Shares on Resignation (i.e. irrespective of their reason for ceasing employment). It is not considered that the risk of forfeiture is anything more than a rare eventuality or possibility. Further, the inability to redeem the Units until ceasing employment or on the 15 th anniversary (unless an Exit Event occurs) does not constitute a real risk of forfeiture. This merely restricts the employee's ability to deal with the underlying Share for a specified time (whether this is considered a genuine disposal restriction is considered later in these reasons). Further and for the avoidance of doubt, we accept that that the accelerated vesting available in the case of an Exit Event will not affect this conclusion as we accept that it is limited to permitting early vesting in circumstances beyond the taxpayers control i.e. on a ASX listing, a Business Sale or a Share Sale, that there is no contrivance and employees will not routinely receive their shares (see example 1.10 in the EM). Consequently as all of the required conditions in subsection 83A-105(1) have been met, subdivision 83A-C will apply to the ESS interests acquired under the Plan. | Detailed Reasoning - When will the ESS Deferred Taxing Point occur?: In relation to the ESS deferred taxing point for a share, section 83A-115 of the ITAA 1997 provides: (1) This section applies if the * ESS interest is a beneficial interest in a • share. Meaning of ESS deferred taxing point (2) The ESS deferred taxing point for the * ESS interest is the earliest of the times mentioned in subsections (4) to (6). (3) However, the ESS deferred taxing point for the * ESS interest is instead the time you dispose of the interest, if that time occurs within 30 days after the time worked out under subsection (2). No restrictions on disposing of share (4) The first possible taxing point is the earliest time when: (a) there is no real risk that, under the conditions of the * employee share scheme, you will forfeit or lose the * ESS interest (other than by disposing of it); and (b) if, at the time you acquired the interest, the scheme genuinely restricted you immediately disposing of the interest--the scheme no longer so restricts you. Cessation of employment (5) The 2nd possible taxing point is the time when the employment in respect of which you acquired the interest ends. Maximum time period for deferral (6) The 3rd possible taxing point is the end of the 15 year period starting when you acquired the interest. As per subsection 83A-115(2) of the ITAA 1997, the ESS deferred taxing point for an ESS interest that is a beneficial interest in a share is the earliest of the times set out in subsections 83A-115(4) to (6) of the ITAA 1997. | Detailed Reasoning - Genuine disposal restrictions: Restrictions or conditions preventing disposal will only be relevant to the determination of the ESS deferred taxing point if they existed when the taxpayer acquired the ESS interest. Restrictions that are added subsequent to acquisition are not relevant (see paragraph 1.197 of the EM). Genuine restrictions preventing disposal could include a condition of the scheme that contractually prevents disposal of shares. A scheme does not genuinely restrict disposal of a share or right if you can take action to enable disposal of it. Whether you are able to take action is a question of fact. A restriction that otherwise meets the conditions for a genuine disposal restriction, but is able to be lifted in exceptional circumstances, for example severe financial hardship, is nonetheless considered to be a genuine restriction. A taxpayer will not be considered to be genuinely restricted from disposing of their shares or rights if they are able to transfer ownership to their spouse or a family trust or in other similar circumstances. | Detailed Reasoning - Application to your circumstances: Under the terms of the Trust Deed following the Proposed Amendments a Participant will only be permitted to deal with their Units (their interest in the underlying Shares) when the Shares are redeemed. Under the terms of the Trust Deed following the making of the Proposed Amendments a Participant can only redeem their Units on the first to occur of: when they (or the relevant Eligible Employee) ceases employment with the Employer (or their Associated Company); the 15th anniversary of the acquisition of the Units; and upon an Exit Event. The disposal restrictions are able to be enforced because the Trustee holds the legal title to the Shares and the Participant has no ability to deal with the underlying Shares and is otherwise restricted from dealing with their Units and their interest in the Units under the terms of the Plan in the Trust Deed. Under the Proposed Amendments, the Participant is not able to request that the Units be redeemed at any other time under the Plan. Therefore, following the making of the Proposed Amendments the scheme genuinely restricts the Participant from immediately disposing of their interest acquired under the scheme. The disposal restriction is only lifted when the Units can be redeemed and the Participant can then request that the Trustee sell the Allocated Shares referable to the Remaining Units or Units held by the Trustee on behalf of the Participant and receive from the Trustee the Employee Redemption Amount (the cash value of the Allocated shares referable to the Remaining Units sold, net of any costs in relation to the selling of those Allocated Shares); or to transfer the Allocated Shares referable to the Remaining Units or Units held by the Trustee to the Eligible Employee or the Participant (excepting in the case of an Exit Event when the employee will receive the Redemption Amount). Therefore, when the Units vest and the employee is considered no longer subject to a real risk of forfeiture (i.e. there is a percentage of Units that they could not forfeit other than in the limited circumstances in clause X), they will be considered to remain subject to a genuine disposal restriction until either: an Exit Event occurs; they cease employment; or the 15 th anniversary of the date of acquisition of the Units. Therefore, assuming an Exit Event does not occur, the ESS deferred taxing point under subsections 83A-115(4) to (6) will be the earlier of: · when the Participant (or relevant employee) ceases employment (at which point the time in subsection 83A-115(4) and 83A-115(5) will occur); or · the 15 th anniversary of the acquisition of the Units (at which point the time in subsection 83A-115(4) and 115(6) will occur). However, the ESS deferred taxing point for the ESS interest will instead be the time when the Participant disposes of the interest, if that time occurs within 30 days after the time worked out above: subsection 83A-115(3). Therefore, after the making of the Proposed Amendments, and assuming the ESS deferred taxing point is not the 15th anniversary of the grant date under subsection 83A-115(6) of the ITAA 1997 nor in accordance with the 30-day rule in subsection 83A-115(3) of the ITAA 1997 and that an Exit Event has not occurred, the ESS deferred taxing point under subsections 83A-115(4) and (5) of the ITAA 1997 will be the same time . | Summary: The amount that will be included in the assessable income of Individual A at the ESS deferred taxing point, when a Disqualification Discount applies, for each Remaining Unit will be the market value of the Share referrable to that Remaining Unit reduced by the cost base (if any) of the Unit. | Detailed Reasoning - Detailed reasoning: Subsection 83A-110(1) provides as follows: Your assessable income for the income year in which the *ESS deferred taxing point for the *ESS interest occurs includes the *market value of the interest at the ESS deferred taxing point, reduced by the *cost base of the interest. The ordinary meaning of market value is used for determining the value of ESS interests. The Commissioner has published Market valuation for tax purposes to assist taxpayers who need to value something (e.g. shares) for tax purposes. The expression market value is used with its ordinary meaning, however, in some cases that meaning is affected by the rules in Subdivision 960-S of the ITAA 1997. Subdivision 960-S provides that any conditions and restrictions that prevent a taxpayer from converting the ESS interest into money are ignored in calculating market value (see section 960-410). | Detailed Reasoning - Application to your circumstances: In the event of a Disqualification Discount applying a Participant is only entitled to retain the percentage of Units as outlined in the table in Clause 14 of the Trust Deed (Remaining Units). Therefore, the amount that will be included in the assessable income of Individual A at the ESS deferred taxing point, when a Disqualification Discount applies, for each Remaining Unit will be the market value of the Share referrable to that Remaining Unit reduced by the cost base (if any) of the beneficial interest in the Share. Where Individual A receives the Employee Redemption Amount at the ESS deferred taxing point in circumstances where he did not provide any consideration to acquire the beneficial interest in the Allocated Shares, provided that the cash value of the Allocated Shares referrable to the Remaining Units reflects the market value of the Shares as explained above, the amount included in his assessable income will be the amount received. | Detailed Reasoning - Detailed reasoning: If the Proposed Amendments to the Trust Deed were to apply to Units acquired by Individual A before the Proposed Amendments were made (existing Units), the ESS deferred taxing point for those Units would not change from that described in the previous Notice of Private Ruling. Restrictions or conditions preventing disposal will only be relevant to the determination of the ESS deferred taxing point if they existed when the taxpayer acquired the ESS interest: paragraph 83A-115(4). Restrictions that are added subsequent to acquisition, such as those considered under the Proposed Amendments, are not relevant (see paragraph 1.197 of the EM). The ESS deferred taxing point calculated with reference to subsection 83A-115(4) to (6) will be the earlier of the time when there is no longer a real risk of forfeiture of the Units or the time when Individual A ceases employment unless Individual A disposes of the interest within 30 days of that time and subsection 83A-115(3) applies.