Private ruling: Employee share scheme - Options - Granted to business partner
Published: July 2013
Ruling period: 2009-10 income year
Date scheme commenced: 1 July 2009

Ruling: Q1: Are you entitled to include only 50% of the taxable benefit arising from the grant of options under an employee share scheme in view of the business arrangements between your business partner and you? | A1: No. | Q2: Are you entitled to an income tax deduction under section 8-1 of the Income Tax Assessment Act 1997 ( ITAA 1997) equal to 50% of the taxable benefit? | A2: Yes. | Q3: Are you entitled to disclose as assessable income under Division 83A of the ITAA 1997 only the discount on the options actually received by you? | A3: Yes.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You, your business partner and your respective consulting entities were jointly involved in managing companies listed on the Australian Stock Exchange and generally shared income derived from these joint endeavours where possible. Your business partner and you were directors in company A which had a significant interest in company B. You were appointed as a director of company B (essentially as a nominee of company A). As a consequence, your managerial efforts were, to a greater extent, then focussed on company B, resulting in an increased workload devolving on your business partner in the other companies you jointly managed. To compensate your business partner for this additional workload, whilst retaining your director's fees from company B, consulting fees paid by company B and the EOP options were agreed to be shared equally. The Employee Option Plan You were a participant in an Employee Option Plan offered by company B (which is listed on the Australian Stock Exchange). The shareholders of company B approved the grant of some options to you or your nominee during the 200X income year. You received notification of the receipt of one-half of these options in a letter shortly afterwards. The other one-half of the options were granted directly to your nominee your business partner who is not a director of company B. Certain documents provided as part of the private ruling application are to be read with and form part of the description of the scheme for the purpose of this ruling.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5, | Income Tax Assessment Act 1997 Section 8-1, | Income Tax Assessment Act 1997 Section 15-2, | Income Tax Assessment Act 1997 Division 83A, | Income Tax Assessment Act 1997 Section 960-410, | Income Tax Assessment Act 1997 Subsection 995-1(1), | Income Tax Assessment Act 1936 Subsection 6(1), | Income Tax Assessment Act 1936 Section 318 and | Taxation Administration Act 1953 Schedule 12-B in Schedule 1.

Reasons for decision: Summary: You are not entitled to include only 50% of the taxable benefit arising from the grant of options under an employee share scheme in view of the business arrangements between your business partner and you. | Detailed Reasoning - Detailed reasoning: Section 6-5 of the ITAA 1997 includes the world-wide ordinary income of an Australian resident in their assessable income. Subsection 6-5(4) of the ITAA 1997 states that a taxpayer will be treated as having received an amount of ordinary income as soon as it is applied or dealt with in any way on the taxpayer's behalf, or as the taxpayer directs. Subsection 15-2(1) of the ITAA 1997 includes the value to a taxpayer of all allowances, gratuities, compensation, benefits, bonuses and premiums provided to you in respect of, or for, or in relation to directly or indirectly to any employment of or services rendered by the taxpayer (including any service as a member of the Defence Force). Subsection 15-2(2) of the ITAA 1997 states that the amount mentioned in subsection 15-2(1) of the ITAA 1997 is assessable whether provided in money or in any other form. Subsection 15-2(3) of the ITAA 1997 lists certain exclusions including: · Amounts that are assessable to the taxpayer under section 6-5 of the ITAA 1997, and · ESS interests to which either Subdivision 83A-B or 83A-C of the ITAA 1997 applies The value of the one-half of the options granted to your business partner represents ordinary income earned by you, being part of the remuneration derived by you specifically and solely as a reward for your directors' services to company B. The granting of the one-half of the options directly to your business partner does not alter the fact that they are part of the reward for your directors' services. Sections 6-5 and 15-2 of the ITAA 1997 can apply to the grant of one-half of the options to your business partner as Division 83A of the ITAA 1997 doesn't apply to them. The value of the one-half of the options granted to your business partner is included in your assessable income under section 6-5 of the ITAA 1997 as a receipt of ordinary income. Section 15-2 of the ITAA 1997 would apply to the grant of the one-half of the options to your business partner if for any reason section 6-5 of the ITAA 1997 did not apply to them. Section 960-410 of the ITAA 1997 requires you to disregard anything that would prevent or restrict the conversion of a non-cash benefit to money when working out its market value. In your case: · The market value of the one-half of the options granted to you will be included in your assessable income in accordance with Division 83A of the ITAA 1997, and · The market value of the one-half of the options granted to your business partner will be included in your assessable income in accordance with either section 6-5 or 15-2 of the ITAA 1997. | Summary: You are entitled to an income tax deduction under section 8-1 of the ITAA 1997 equal to 50% of the taxable benefit. | Detailed Reasoning - Detailed reasoning: Subsection 8-1(1) of the ITAA 1997 allows you to claim a deduction in respect of any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income. Where a taxpayer is required to 'pay over' their salary or director's fees to a third party, the Commissioner will, in some circumstances, require the taxpayer to declare the salary or director's fees as assessable income, but then allow the taxpayer to claim a deduction equal to the income 'paid over'. These circumstances include where: · The taxpayer derives assessable income as a director of a subsidiary company, but is required to pay all of this income to the head company of which he is also a director or employee (Income Tax Ruling IT 2319) · The taxpayer derives salary and wages from work at a hospital, but is required to repay part of that income to the hospital under the terms of their contract of work (Class Ruling CR 2005/26) The Commissioner has considered the nature of the agreement between your business partner and you in relation to the additional workload that was undertaken by your business partner as a direct result of your duties as a director of company B and the consequences that would have likely resulted if this additional workload was not recognised. As a result, the Commissioner has concluded that the 'paying over' of the one-half of the options to your business partner is an expense that you have incurred in earning your remuneration as a director of company B. Consequently, you are entitled to claim a deduction equal to the amount that is to be included in your assessable income under either section 6-5 or 15-2 of the ITAA 1997 in respect of the grant of these options to your business partner. | Summary: You are entitled to disclose as assessable income under Division 83A of the ITAA 1997 only the discount on the one-half of the options actually received by you. | Detailed Reasoning - Detailed reasoning: Division 83A of the ITAA 1997 provides the provisions for determining: · Whether certain entitlements are considered to be ESS benefits, and if so: · When the ESS benefits are assessable · How much is assessable, and · Who is assessable. | Detailed Reasoning - Meaning of ESS interest and employee share scheme: Subsection 83A-10(1) of the ITAA 1997 defines an ESS interest in a company to be a beneficial interest in: · A share in a company, or · A right to acquire a beneficial interest in a share in the company. The options are rights to acquire beneficial interests in shares in company B and so are ESS interests. Subsection 83A-10(2) of the ITAA 1997 defines an employee share scheme as 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 employee's employment. There are two issues generated by subsection 83A-10(2) of the ITAA 1997 that must be resolved before it can be determined whether or not all of the options (or only one-half of them) were granted under an employee share scheme. They are: · Were they granted in relation to your employment, and · Is your business partner an associate of yours. | Detailed Reasoning - Relationships similar to employment: Section 83A-325 of the ITAA 1997 applies Division 83A of the ITAA 1997 to relationships similar to employment. Specifically, Item 1 of the Table in section 83A-325 of the ITAA 1997 provides that Division 83A of the ITAA 1997 also applies to: · An individual who receives, or is entitled to receive, work and income support withholding payments (otherwise than as an employee) · As if he or she were employed by the entity that pays or provides the work and income support withholding payments (or is liable to do so), and · The relationship because of which the entity pays or provides the work and income support withholding payments to you (or is liable to do so) constitutes that employment. Subsection 995-1(1) of the ITAA 1997 applies the definition of 'work and income support withholding payments and benefits' from the Income Tax Assessment Act 1936 (ITAA 1936) as the definition of 'work and income support withholding payment' for the purposes of the ITAA 1997. The definition of 'work and income support withholding payment and benefits' in subsection 6(1) of the ITAA 1936 includes payments from which an amount must be withheld under a provision of Subdivision 12-B in Schedule 1 to the Taxation Administration Act 1953 (TAA). Section 12-40 in Subdivision 12-B in Schedule 1 to the TAA. Section 12-40 in Subdivision 12-B in Schedule 1 to the TAA requires an incorporated company to withhold an amount from a payment of remuneration it makes to an individual as a director of the company, or as a person who performs the duties of a director of the company. The whole of the options were provided to you in relation to your duties as a director of company B. This is a relationship similar to employment as tax must be withheld from the directors fees paid to you. Therefore, all of the options were granted in relation to your employment. | Detailed Reasoning - Associates: Subsection 995-1(1) of the ITAA 1997 states that the term 'associate' has the meaning given by section 318 of the ITAA 1936. Subsection 318(1) of the ITAA 1936 includes the following as associates of an entity (in this subsection called the primary entity) that is a natural person (otherwise than in the capacity as trustee): (b) a partner of the primary entity or a partnership in which the primary entity is a partner. The Commissioner has considered the nature of the relationship between your business partner and yourself and concluded that your business partner is not your partner for the purposes of subparagraph 318(1)(b) of the ITAA 1936 and therefore not your associate. Consequently, the one-half of the options granted to your business partner in respect of your duties as a director of company B were not granted under an employee share scheme and are not included in your assessable income under Division 83A of the ITAA 1997. Note: There are a number of provisions that can apply to include the grant of the one-half of the options to your business partner in your assessable income. This answer merely states that one of those provisions (Division 83A of the ITAA 1997) doesn't apply to that grant of options.

Reasons for decision: While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.