Private ruling: Capital gains tax - shares - employee share scheme - deferred taxing point
Date of advice: 8 December 2015
Published: February 2016
Ruling period: Income year ending 30 June 2015.
Date scheme commenced: 1 July 20XX.

Ruling: Q1: Will the options granted in 20XX and 20XX be assessed under Division 83A of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Will the options granted in 20XX and 20XX be subject to the provisions of Part 3-1 of the ITAA 1997? | A2: Yes. Issue 2 | Q3: Will the rights granted in 20XX and 20XX be assessable under Subdivision 83A-C of the ITAA 1997? | A3: Yes.

Relevant facts and circumstances: The arrangement that is subject of the private ruling is described below. This description is based on the documentation provided with the private ruling application and those documents form part of, and are to be read with this description. Employee share options You participated in an Employee Share Option Plan (ESOP) offered by your employer, Company A, during the 20XX-XX and 20XX-XX income years and were granted the following options during those income years. Your payslip issued during the 20XX-XX income year outlines that a payroll deduction amount related to an ESOP deduction. The acquisition price of your 20XX options was at least equal to the market value of the options on the grant date in 20XX. Your payslip issued during the 20XX-XX income year outlines that a payroll deduction amount related to an ESOP deduction. The acquisition price of your 20XX options was at least equal to the market value of the options on the grant date in 20XX. You received options in Company B in exchange for your options in Company A as a result of the restructure of the Company Group. You made the choice for the scrip for scrip roll-over to apply to your options. You sold some of the shares received as a result of exercising some of your 20XX options during the 20XX-XX income year. Restricted share units You were granted restricted share units (RSUs) during the 20XX-XX income year under the Company B 20XX Plan for no consideration. The 20XX RSUs are expected to vest over a number of years, starting in the 20XX-XX income year, with the RSUs expiring in the 20XX-XX income year. You were granted some RSUs during the 20XX-XX income year under the Company B 20XX Plan, for no consideration. The 20XX RSUs are expected to vest over a number of years, starting in the 20XX-XX income year, with the RSUs expiring in the 20XX-XX income year. For the purposes of this private ruling, you will receive ordinary shares in Company B when your RSUs are exercised.

Relevant legislative provisions: Income Tax Assessment Act 1997 Part 3-1 | Income Tax Assessment Act 1997 Part 3-3 | Income Tax Assessment Act 1997 Section 102-20 | Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 124-785 | Income Tax Assessment Act 1997 Division 83A | Income Tax Assessment Act 1997 Section 83A-10, | Income Tax Assessment Act 1997 Subdivision 83A-B | Income Tax Assessment Act 1997 Section 83A-25 | Income Tax Assessment Act 1997 Subdivision 83A-C | Income Tax Assessment Act 1997 Section 83A-105 | Income Tax Assessment Act 1997 Section 83A-110 | Income Tax Assessment Act 1997 Section 83A-120

Reasons for decision: Summary: The employee share scheme provisions will not apply to employee share scheme interests that are not acquired at a discount. | Detailed Reasoning - Employee share schemes: All references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise noted. Division 83A applies to shares, rights and stapled securities acquired under an employee share scheme on or after 1 July 2009. An employee share scheme (ESS) 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, of the company, or a subsidiary of the company, in relation to the employee's employment. Division 83A applies when ESS interests such as shares, stapled securities and rights (including options) to acquire shares and stapled securities in a company are provided to its employees in relation to their employment. Where an employee acquired ESS interests at a discount under the ESS, the discount is taxed under these rules. When the ESS provisions apply, generally the ESS interests are exempt from CGT implications until the interest has been taxed under the ESS rules. Where an employee does not acquired ESS interests at a discount, the ESS rules will not apply. However, the benefits given in relation to the ESS interests may be taxed under other provisions of the taxation law, such as the capital gains tax regime Application to your situation You were granted options by your employer, Company A, during the 20XX-XX and 20XX-XX income years. Based on the information and documentation provided, it is the Commissioner's view that your 20XX and 20XX options are ESS interests, but are not subject to Division 83A for the following reasons: • For ESS interests to be subject to Division 83A, they must be acquired at a discount. Based on the information provided, it is not viewed that you had acquired the options at a discount, but had paid the market value for the options, which had been deducted from your pay; and • From 1 July 2009, if employers provide ESS interests at a discount to their employees or their associates, they are subject to reporting obligations. They must provide an ESS statement to their employees by 14 July after the end of the financial year and they must also provide an ESS annual report to the Australian Taxation Office by 14 August after the end of the financial year. In your case, your employer has not provided an ESS statement in relation to either the 20XX or 20XX options to either you or to the Australian Taxation Office (ATO). The fact that no ESS statements have been provided by your employer supports that the options were not issued at a discount. Therefore, as it is not viewed that you had been granted the options at a discount, they will not be assessed under the ESS provisions. Accordingly, we have addressed taxation implications in relation to the options under the capital gains tax provisions as follows: | Summary: The ESS provisions do not apply where an employee does not acquire ESS interests at a discount and the benefits given in relation to those ESS interests will be subject to the capital gains tax provisions. | Detailed Reasoning - Capital gains tax: The main capital gains tax (CGT) provisions are contained in Part 3-1. A capital gain or capital loss is made when a CGT event happens to a CGT asset you own. The most common event is CGT event A1 which happens when a person disposes of their ownership interest in a CGT asset to someone else. A capital gain is made if the amount received (called capital proceeds) from the disposal exceeds the cost base (the cost of the asset and certain other costs associated with acquiring, holding and disposing of the asset) of the CGT asset. Application to your situation As the ESS provisions do not apply to your 20XX and 20XX options, the CGT provisions will apply to determine whether or not a capital gain or capital loss will occur in relation to the disposal of the shares resulting from the exercising of the options. As a result of the restructure of the Company Group, each Company A option holder received a corresponding option in Company B in exchange for the cancellation of their Company A options. The market value of the replacement options for each original option holder was at least substantially the same as the market value of the original interest immediately preceding the Schemes implementation time. An option holder who made a capital gain from the disposal of their Company A option was eligible to choose scrip for scrip roll-over. As a result of the restructure, you are viewed as having disposed of your Company A options and received Company B options in exchange for your original options. You made a capital gain as a result of the restructure and made the choice for the scrip for scrip roll-over to apply to your options. As a result of that choice, you were able to disregard the capital gain made on the disposal of your original options and are viewed as having acquired the Company B options for the cost base of your original Company A options, being the amounts deducted from your pay in the 20XX-XX and 20XX-XX income years. The cost base of your 20XX and 20XX options will be used when determining whether you have made a capital gain or capital loss on the disposal of the options, or the disposal of the resulting shares after the options have been exercised. During the 20XX-XX income year, some of your 20XX options vested. You exercised some of the vested option during the 20XX-XX income year and the resulting shares were disposed of on the same day. You received the net amount in foreign currency after the exercise costs had been taken out of the gross proceeds amount. The net proceed amount was converted into Australian currency during the 20XX-XX income year. Based on the information provided, the capital gain made on the disposal of the resulting shares will be calculated as follows: Net proceeds received (being Gross proceeds less any costs incurred in relation to the disposal of the shares) Less Cost base of the 2012 options that were exercised (being apportionment of the original cost base for your 2012 options) Equals Capital gain The capital gain amount should be included in your income tax return in the income year in which the shares were disposed of. Note: The 50% CGT discount is not available in relation to the disposal of the resulting shares as your options had been exercised and the resulting shares had been disposed of on the same day. Therefore, the conditions for the 50% CGT discount to apply have not been met in relation to the disposal of the resulting shares, specifically that the resulting shares had not been owned by you for at least 12 months prior to them being disposed of. The capital gain or capital loss made on the disposal of the remaining 20XX and 20XX options will be calculated according to the general CGT provisions. The cost base of your remaining options when completing your calculations will be the amount per option paid to acquire them when they were issued. | Summary: Where there is a real risk of forfeiture, the discount on an ESS interest is included in the employee's assessable income in the income year in which the deferred taxing point occurs. | Detailed Reasoning - Detailed reasoning: The RSUs provide you with the right to acquire shares in Company B in relation to your employment, and were issued at a discount to their market value. Therefore, the basic conditions for the application of Subdivision 83A-B to the RSUs have been met. | Detailed Reasoning - Tax deferred schemes: Subdivision 83A-C relates to the deferred inclusion of gain in assessable income, and will apply to the rights acquired under an ESS if the following conditions in section 83A-105 are satisfied: 1. Subdivision 83A-B would apart from this section apply to the interest. 2. When the employee acquires the interest they are employed by the company. 3. When the employee acquires the interest all the interests available for acquisition under the ESS relate to ordinary shares. 4. When the employee acquires the interest the predominant business of the company is not the acquisition, sale or holding of shares, securities or other investments. 5. Immediately after the employee acquires the interest they do not hold a beneficial interest in more than 5% of the shares in the company and are not in a position to cast or control the casting of more than 5% of the maximum number of votes that might be cast at a general meeting of the company. 6. 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, exercising the right or letting the right lapse) or forfeit or lose the beneficial interest in the share (other than by disposing of it). If you acquire ESS interests under a tax-deferred scheme, you will be assessed for tax purposes in the income year in which the deferred taxing point occurs. | Detailed Reasoning - Real risk of forfeiture: In relation to the sixth condition as outlined above, Subdivision 83A-C applies to a right if, under the conditions of the ESS when the right is granted, there is a real risk that a Participant will forfeit or lose the right (other than by disposing of it, exercising the right or letting it lapse). Whether or not a real risk of forfeiture (RRF) is present will depend on the facts and circumstances of each scheme and the individual circumstances of the employee. The meaning of 'real' is something more than a mere possibility. An ESS interest will not be at real risk of forfeiture if a reasonable person would disregard the risk as highly unlikely to occur or as nothing more than a rare eventuality or possibility. RRF in a scheme may include conditions where retention of the ESS interests is subject to: • a minimum term of employment, or • performance hurdles There is no RRF 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, or • provides for an employee to forfeit an ESS interest if they are dismissed for fraud or gross misconduct. ATO Interpretive Decision (ATO ID) 2010/61 broadly states that an ESS interest acquired by an employee is at real risk of forfeiture if a reasonable person would consider that there is a real risk that the employee may forfeit or lose the ESS interest, other than by intentionally taking no action to realise the benefit. The ATO ID explains that the meaning of 'real' in this context is something more than a mere possibility. In this regard, an ESS interest will not be at real risk of forfeiture if a reasonable person would disregard the risk as highly unlikely to occur or as nothing more than a rare eventuality or possibility. The facts and circumstances of each scheme and the individual circumstances will determine whether there is a real risk of forfeiture. | Detailed Reasoning - Deferred taxing point: The deferred taxing point for a right is the earliest of the following times: • seven years after you acquired the right • when you cease employment in respect of which you acquired the right • when there is no real risk of forfeiting the right and the scheme no longer genuinely restricts disposal of the right; or • when there is no real risk of forfeiting the right or underlying share, and the scheme no longer genuinely restricts exercise of the right or disposal of the resulting share. If you acquire ESS interests under a tax-deferred scheme, the discount will be the market value of the ESS interests at the deferred-taxing point, reduced by the cost base of the ESS interests | Detailed Reasoning - The 30 day rule: Where you dispose of an ESS interest, or the share you acquired on exercise of a right, within 30 days after the deferred taxing point occurred, the date of that disposal becomes the deferred taxing point, known as the 30 day rule. For example, a deferred taxing point occurs on 10 March 2012 and the employee disposes of the ESS interest on 29 March 2012. As the disposal occurred within 30 days, the deferred taxing point will be 29 March 2012. Application to your situation We have considered whether your RSUs should be assessed at a deferred taxing point. Based on the information and documentation provided we have determined that in your circumstance all the requirements for section 83A-105 to apply, as outlined above, have been met because: • at the time of receiving the rights you were employed by Company A • the rights grant an interest in an ordinary share • you do not hold a beneficial interest in more than five percent of the total securities of Company B; and • the rights are under a real risk of forfeiture due to the conditions that had to be met before the rights could vest, as outlined in the 20XX and 20XX RSU Plans. As we view that you have received ESS interests that are subject to a real risk of forfeiture, you will not be subject to tax on your ESS interests in the year of receipt but in the income year in which the deferred taxing point occurs. Consequently deferred taxation will apply and the value of the ESS interests will need to be included in your taxable income at the deferred taxing point calculated under section 83A-120. In your situation, the discount arising in relation to your RSUs will be included in your income tax returns in the income years in which the earliest of the following times: • when you cease employment with any Company Group member • when the RSU has not been exercised, the income year in which there is no longer any risk of forfeiture due to the conditions not being met. That is, the income year in which both the conditions have been met; or • seven years after the RSUs were granted. As none of these events have occurred in the 20XX-XX income year, no amount relating to these ESS interests will be included in your 20XX-XX assessment. However, the discount will be included in your future income tax returns when the earliest of the events listed above occurs in relation to your 20XX and 20XX RSUs.