Private ruling: Cancellation and reissue of employee options
Published: September 2011
Ruling period: Year ending 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Questions and Answers | Will the options be considered to have been acquired at the time that they are | reissued? | Yes. | Will any discount amount be calculated based on the relative market values at the time of reissue? | Yes.

Relevant facts and circumstances: You are a director of a company. The company's Employee Options Scheme was originally approved by shareholders at an Annual General Meeting (AGM) a number of years ago and was re-ratified at an AGM in some time later. The terms of the scheme clearly state that the directors could determine: · the number of employee options to be issued to each eligible employee (including the directors themselves), · the timing of the issuing of employee options, · the exercise price and term (being no less than a specified percentage of the ordinary share price at the time of issue, and no more than three years until expiry). The total number of options issuable under the scheme at any time was not to exceed a specified percentage of the number of ordinary shares in the company. Some time later, you were issued options under the scheme. You did not pay income tax on the options at the time of issue, as their exercise price exceeded the company's share price. Some time later, the Australian Stock Exchange (ASX) contacted the company and asked whether the options had been issued with shareholder approval in accordance with ASX Listing Rule 10.14. The company found that while shareholder approval had been received at the re-ratification AGM both for the terms and conditions of the scheme and also under Listing Rule 7.2 Exception 9 (allowing options issued under the scheme to be exempt from the '15% rule' relating to the number of securities able to be issued by directors in any 12 month period without shareholder approval), there had not been shareholder approval received for the issuing of employee options to the directors. Some time later, the ASX advised that the company had breached Listing Rule 10.14 by not obtaining shareholder approval for the issuing of options to individual directors. As a consequence the ASX requested that the options be cancelled. Accordingly, the company has cancelled them. If the company so chooses, options may be reissued to the directors on the same terms and conditions as the previous options once the company calls an AGM and obtains shareholder approval in accordance with Listing Rule 10.14. The company are considering reissuing the options. The company's share price is now higher than it was when the options were originally issued, and as a result the directors are concerned that upon reissue an income tax liability may arise under Section 83A-315 of the Income Tax Assessment Act 1997 (ITAA 1997).

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 83A-30, | Income Tax Assessment Act 1997 Section 83A-130 and | Income Tax Assessment Act 1997 Section 83A-310.

Reasons for decision: Summary: Generally where a company undertakes a restructure or is the subject of a takeover, any employee options that they have issued that are matched by new options are treated as a continuation of the old options. However this only applies where a takeover or restructure has occurred. Furthermore, where employee options are granted to a taxpayer and the options are involuntarily forfeited or lost, the option is taken to have never been acquired. In your situation, the options were involuntarily cancelled based on the request from the ASX rather than as a result of the company restructuring or being taken over. This will result in them being taken to have never been acquired. Accordingly, it is considered that the original options ceased to exist when they were cancelled. Any reissue of options will be a fresh issue and any discount in respect of the options will be calculated based on the relative market values at the time of reissue.

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