Private ruling: Commissioner's discretion - ESS
Date of advice: 25 August 2025
Published: 27 October 2025
Ruling period: Income year ending 30 June 20XX

Ruling: Q1: Will the Commissioner exercise his discretion under paragraph 83A-45(5)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow the minimum holding period for Options acquired under the Employee Option Plan (Option Plan) to end on the date of completion of the Share Purchase Agreement? | A1: No. | Q2: If the answer to Question 1 is no, will the minimum holding period requirement set out in subsections 83A-45(4) and (5) of the ITAA 1997 be taken to be satisfied pursuant to subsection 83A-130(3) of the ITAA 1997 in respect of Options (and those Shares in the Company acquired by employees under the Plan on exercise of those Options) which were disposed of under the Transaction in exchange for ordinary shares in the Parent of the Purchaser? | A2: No.

Relevant facts and circumstances: The Company is an Australian resident private company incorporated in 20XX. The Company has no subsidiary. The Company's Equity Incentive Plan The Company established the Executive Option Plan (the Plan) to allow the board to make offers to eligible executives to acquire shares in the company through the exercise of discrete and mutually exclusive tranches of options. The Company issued options to employees or their associated entities (the Participants) that that were intended to qualify for the ESS start-up concessions under Subdivision 83A-B of the ITAA 1997. The exercise price of the Options was greater than or equal to the market value of an ordinary shares in the Option Plan when the Options were granted, taking into account Legislative Instrument Income Tax Assessment (Methods for Valuing Unlisted Shares) Approval 2015 . The Plan is governed by the Plan Rules, details provided. The Company granted options under the Plan. The Company provided details regarding the vesting conditions. In line with the prescribed vesting conditions, the exercising of the Options and subsequent issue of shares has occurred. The Company provided sample of the offer letter along with its application, the sample letter contains a general reference to restriction of dispose of X years. The Plan Rules provides that to the extent of any inconsistency between the Plan Rules and the offer terms, the terms and conditions as set out in the Terms of Offer (i.e. the offer letters) will prevail over any other provision of the Plan Rules. The Plan Rules allows that the Participants dispose the Options in an exit event and does not restrict such a disposal under that clause to an overriding X-year minimum holding period or exercise of the Commissioner's discretion pursuant to subparagraph 83A-45(5)(a)(ii) of the ITAA 1997. The transaction The Company started negotiations in January 20ZZ with a purchaser (the Purchaser) in respect of the sale of all the shares in the Company (the Transaction). The Purchaser and the Company executed a share purchase agreement on XX XX 20ZZ. The Transaction was completed on XX XXX 20ZZ. The grant of the Options and the ultimate sale of the Shares in connection with completion of the Transaction falls within X years of the grant of all Options issued under the Plan. The Purchaser and related entities, and Company's shareholders, are not related to each other. The Transaction is on arms' length terms. .

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 83A | Income Tax Assessment Act 1997 subsection 83A-10(1) | Income Tax Assessment Act 1997 subsection 83A-10(2) | Income Tax Assessment Act 1997 subsection 83A-25(1) | Income Tax Assessment Act 1997 section 83A-33 | Income Tax Assessment Act 1997 subsection 83A-33(1) | Income Tax Assessment Act 1997 subsection 83A-33(2) | Income Tax Assessment Act 1997 subsection 83A-33(3) | Income Tax Assessment Act 1997 subsection 83A-33(4) | Income Tax Assessment Act 1997 subsection 83A-33(5) | Income Tax Assessment Act 1997 subsection 83A-33(6) | Income Tax Assessment Act 1997 section 83A-35 | Income Tax Assessment Act 1997 section 83A-45 | Income Tax Assessment Act 1997 subsection 83A-45(1) | Income Tax Assessment Act 1997 subsection 83A-45(2) | Income Tax Assessment Act 1997 subsection 83A-45(3) | Income Tax Assessment Act 1997 subsection 83A-45(4) | Income Tax Assessment Act 1997 subsection 83A-45(5) | Income Tax Assessment Act 1997 paragraph 83A-45(5)(a) | Income Tax Assessment Act 1997 subparagraph 83A-45(5)(a)(i) | Income Tax Assessment Act 1997 subparagraph 83A-45(5)(a)(ii) | Income Tax Assessment Act 1997 subsection 83A-45(6) | Income Tax Assessment Act 1997 section 83A-335

Reasons for decision: Summary: The Commissioner will not exercise his discretion under paragraph 83A-45(5)(a) to allow the minimum holding period for Options acquired under the Option Plan to end on the date of Completion of the Transaction. | Detailed Reasoning - Detailed reasoning: An 'employee share scheme' is defined in subsection 83A-10(2) 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. An 'ESS interest' in a company is defined in subsection 83A-10(1) as either a beneficial interest in a share in the company, or a beneficial interest in a right to acquire a beneficial interest in a share in the company. Subsection 83A-25(1) provides that your assessable income for an income year in which an ESS interest is acquired includes the discount given in relation to the interest. Sections 83A-33 (start ups) and 83A-35 (other cases) provide for a reduction of the amount of the discount included in your assessable income under subsection 83A-25(1), by the total of the amounts included in your assessable income under that subsection provided, among other things, the further conditions in section 83A-45 are satisfied. One of the conditions in section 83A-45 is the minimum holding period condition under subsection 83A-45(4): Minimum holding period 83A-45(4) This subsection applies to an ESS interest you acquire under an employee share scheme if, at all times during the interest's minimum holding period, the scheme is operated so that every acquirer of an ESS interest (the scheme interest ) under the scheme is not permitted to dispose of: (a) the scheme interest; or (b) a beneficial interest in a share acquired as a result of the scheme interest; during the scheme interest's minimum holding period. Subsection 83A-45(4) requires the employee share scheme to be operated, at all times during the minimum holding period of the ESS interest, on the basis that all participants acquiring an ESS interest under the scheme are constrained from disposing of the ESS interest, or a beneficial interest in a share acquired as a result of the ESS interest during the ESS interest's minimum holding period. Subsection 83A-45(5) provides that the minimum holding period starts when the ESS interest is acquired under the scheme and ends X years later or when the employee's employment ceases, whichever is earlier and subject to paragraph 83A-45(5)(a) which states that the Commissioner has the discretion to shorten the minimum holding period where the Commissioner is satisfied that: • the operators of the scheme intended for subsection [83A-45(4)] to apply to the interest during the X years after the acquisition of the interest; and • at the earlier time that the Commissioner allows, all membership interests in the relevant company were disposed of under a particular scheme; For the purposes of subparagraph 83A-45(5)(a)(ii), the Commissioner is satisfied that all membership interests in the Company were disposed of under the Transaction. For the purposes of subparagraph 83A-45(5)(a)(i), the Commissioner has regard to whether, when the Participants their Options, there was a genuine intention for the Options to be held for the minimum holding period. [1] In that regard, the operator of the scheme fails the test if they allowed the ESS interest holders to dispose of their interests prior to the end of their minimum holding period, or there was objective evidence that the scheme was not operated to prevent the ESS interest holders from doing so. Generally speaking, where the rules of an employee share scheme: • contain a clause (commonly referred to as a 'tag along' or 'drag along' clause) permitting the acquirer of an ESS interest to dispose of their interest in the event of a trade sale or IPO, or either, at the time of such event; and • cessation of employment aside, do not contain an overriding restriction on any disposal of their ESS interest in the first X years (reflecting the minimum holding period provided for in paragraph 83A-45(5)(a)) unless the Commissioner allows an earlier time by exercising his discretion pursuant to subparagraph 83A-45(5)(a)(ii), the Commissioner will not be satisfied (for the purposes of subparagraph 83A-45(5)(a)(i)) that there was a genuine intention for the ESS interest to be held for the minimum holding period. In the Company's circumstances, on an objective reading of the Plan Rules, particularly in relation to how that clause applies in an 'Exit Event': • permits the acquirer of an ESS interest to dispose of their interest at the time of such event; and • does not restrict such a disposal under that clause to an overriding X-year minimum holding period or exercise of the Commissioner's discretion (i.e. does not reflect the requirements under paragraph 83A-45(5)(a)) We note that in the sample offer letter submitted with the application, there was a general reference to restriction on disposal of X years. However, we are not satisfied that the terms of the Rules, as a whole, operate to subject all disposals made under the Plan (e.g. like Exit Events ) to an overriding X-year minimum holding period, or a requirement to seek exercise of the Commissioner's discretion (if the intention is for the acquired ESS interests to be disposed of earlier than X years). While the Plan Rules provide an outcome when inconsistent provisions are applied, the Commissioner does not accept that the clause regarding exit events and the terms of the offer letters are inconsistent provisions of the Plan. Therefore, the Commissioner is not satisfied that the Option Plan operated to prevent the Participants from disposing of their Options prior to the end of their minimum holding period. They were permitted to dispose of the Options, and the fact that the condition for disposal is an Exit Event is not inconsequential or immaterial. As such, the Commissioner will not exercise his discretion under paragraph 83A-45(5)(a) to allow the minimum holding period for Options acquired under the Option Plan to end on the date of Completion of the Transaction. Accordingly, in the absence of the Commissioner having exercised this discretion, the minimum holding period condition under subsection 83A-45(4) does not apply to Options acquired under the Plan and a Participant under the Plan cannot reduce the amount of the discount included in their assessable income under subsection 83A-25(1), pursuant to subsection 83A-33(1). | Summary: The conditions in section 83A-130 are not met. | Detailed Reasoning - Detailed reasoning:: If certain conditions are satisfied (section 83A-130), ESS interests in a new company that are acquired in connection with a takeover or restructure are treated as a continuation of the ESS interests held just before the takeover or restructure for the purposes of Division 83A. Section 83A-130 applies where: • you held ESS interests (the old interests) in a company acquired under an employee share scheme just before that company was subject to a takeover or restructure (subsection 83A-130(1)) • as a result of the takeover or restructure, you stop holding the old interests and acquire new interests in a new company which can reasonably be regarded as matching the old interests (subsection 83A-130(2)) • the new interests relate to ordinary shares (subsection 83A-130(4)) • at or about the time you acquire the new interests, you are employed by the new company or a related company, and • at the time you acquire the new interests ­ you do not hold a beneficial interest in more than XX% of the shares in the new company (subparagraph 83A-130(9)(b)(i)), or ­ you 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 new company (subparagraph 83A-130(9)(b)(ii) An 'ESS interest' in a company is defined in subsection 83A-10(1) as either a beneficial interest in a share in the company, or a beneficial interest in a right to acquire a beneficial interest in a share in the company. The ESS interest granted under the plan is the right to acquire a beneficial interest in a share of the company (i.e. Options). The shares acquired from exercising those Options were not ESS interest granted under the Plan. There was no new ESS interest granted for the purpose of section 83A-130. As a result, the Participants do not hold ESS interest in the Company just before that company was subject to a takeover or restructure. As such, the conditions in section 83A-130 are not met. [1] The Explanatory Memorandum for the Tax and Superannuation Laws Amendment (Employee Share Schemes) Bill 2015 explaining the introduction of the Commissioner's discretion in subsection 83A-45(5), at paragraph 1.82.