Private ruling: Employee Share Schemes - Taxation of Discounts
Date of advice: 28 November 2016
Published: February 2017
Ruling period: Income years ended 30 June 20WW, 20XX, 20YY and 20ZZ.

Ruling: Q1: Is the taxing point for the rights issued under the employee share scheme (ESS) described deferred until the first time at which the rights may be disposed? | A1: No. The Options are taxed in the income year in which they are granted.

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. The Company granted the Taxpayer options (the Options) for nil consideration. The Options are subject to a disposal restriction, after which all the Options, vested and unvested, are transferrable. The Options vest after the above disposal restriction ends.

Relevant legislative provisions: Income Tax Assessment Act 1997 Paragraph 83A-25(1) | Income Tax Assessment Act 1997 Paragraph 83A-35(7) | Income Tax Assessment Act 1997 Section 83A-15 | Income Tax Assessment Act 1997 Subdivision 83A-B | Income Tax Assessment Act 1997 Subdivision 83A-C | Income Tax Assessment Act 1997 Division 83A Summary | The taxing point for the Options is the time at which they were granted as there is no real risk of forfeiture. | Detailed reasoning | All references are to the Income Tax Assessment Act 1997 unless otherwise stated. Detailed reasoning | All references are to the Income Tax Assessment Act 1997 unless otherwise stated. Division 83A broadly provides for the taxation of employee share scheme interests acquired at a discount. The discount received on interests acquired under an ESS will generally be included in your assessable income of the income year in which the interests are acquired unless certain conditions are met and there is either a real risk of forfeiture or the interests are acquired under certain salary sacrifice arrangements. Where such conditions are met your taxing point may be deferred (see Subdivision 83A-C). | Section 83A-20 provides that Subdivision 83A-B applies if you acquire an ESS interest under an employee share scheme and at a discount. However, Subdivision 83A-B will not apply and Subdivision 83A-C will apply if subsection 83A-105(1) applies | Subsection 83A-105(1) will only apply in situations where, pursuant to subparagraph 83-105(1)(c)(ii), subsection (3) or (4) of section 83A-105 applies. Subsection (4) concerns ESS interests acquired under a salary sacrifice arrangement and is not applicable here. Thus subsection (3) must be met for subsection 83A-105(1) to apply. | Subsection (3) relevantly provides that subsection 83A-105 applies to an ESS interest you acquire under an employee share scheme if, when you acquire the interest, there is a real risk that, under the conditions of the scheme, you will forfeit or lose the ESS interest, other than by disposing of it, exercising it, or letting it lapse. | In relation to a real risk of forfeiture, the Explanatory Memorandum to the Tax Laws Amendment (2009 Budget Measures No. 2) Bill 2009 provides: | 1.41 Deferral of taxation is considered the appropriate treatment in situations where there is a real risk that the benefits of shares or rights may never be realised because the ESS interests may be forfeited. | 1.42 An ESS interest is at real risk of forfeiture if a reasonable person would consider that there is a real risk that the employee would lose or forfeit the interest or never receive it, other than by selling or exercising it, by intentionally taking no action to realise the benefit, or through the market value of the ESS interest falling to nil. | 1.43 Providing for deferral of tax in these situations recognises that the employee may never have a chance to realise the economic value of the ESS interest, and that having employee remuneration 'at risk' in this manner is consistent with the purpose of concessionally taxing employee share schemes, to align the interests of employees and employers. | In this situation a reasonable person would not consider that there is a real risk that the benefits of the Options may never be realised due to forfeiture as the Options may be sold prior to vesting. The vesting conditions for the exercise of Options can be met at a time before expiry. However, the disposal restrictions end at a time prior to the expiry, after which point they may be disposed of at any time before expiry. Thus, the Options could only lapse and be forfeited where they are not disposed of prior to the expiry date. As such there is no risk that there will never be a chance to dispose of the Options and, thus, no real risk of forfeiture for the purposes of paragraph 83A-105(3). | As at the time of grant there was no real risk of forfeiture, Subdivision 83A-B applies to the Options. Subdivision 83A-B includes the discount received from the granting of ESS interests in the assessable income for the income year in which they were granted, pursuant to paragraph 83A-25(1).