Private ruling: Commissioner's discretion under section 83A-45(4) of the Income Tax Assessment Act 1997
Date of advice: 1 September 2021
Published: November 2021
Ruling period: Income year ending 30 June 20XX | Income year ending 30 June 20XX
Date scheme commenced: The scheme has commenced.

Ruling: Q1: Will the Commissioner exercise his discretion under paragraph 83A-45(5)(a) of the Income Tax Assessment Act 1997 to allow the minimum holding period for all options that qualify for concessional treatment under section 83A-33 to be reduced on the basis that all membership interests in the Company were disposed of under a 100% takeover arrangement? | A1: Yes.

Relevant facts and circumstances: Overview The Company is the head entity of a tax consolidated group. Employees, including XX are employed by Pty Ltd, a subsidiary of the Company. The Company and Pty Ltd are Australian resident private companies. The Employee Share Option Plan (ESOP) was entered into on XX. By deed dated XX (Option Deed), the Company granted the ESOP employees options to acquire ordinary shares in the Company, which were subject to the terms of the Option Deed and the ESPOP (ESOP Options). The letter of offer to participate in the ESOP states that the Options may not be disposed of, other than pursuant to Clause X of the ESOP. Clause X of the ESOP places restrictions on when Options may be sold. In particular, clause X provides for an overriding restriction, stating that broadly, legal or beneficial interests in an Option may not be disposed of (other than a disposal in accordance with section 83A-130 of the ITAA97) until the earlier of: (a) 3 years after the issue of the Option or such earlier time as the Commissioner of Taxation allows in accordance with section 83A-45(5) of the ITAA 1997; and (b) where the Optionholder becomes a Leaver. The Company has, at all times, operated the ESOP such that all options would not be permitted to be disposed of during the minimum holding period in accordance with the requirement in subsections 83A-45(4) and (5) of the ITAA 1997. When the Options were granted there was no indication that a 100% sale of the Company would occur. The Options qualify for the start-up concession under section 83A-33 of the ITAA 1997. The Transaction Pursuant to the Share Purchase Deed ( SPD ), which was executed on X, the shareholder of the Company entered into a transaction to sell 100% of its shares in the Company to an unrelated third party (Clause X of the SPD). As part of the transaction, pursuant to Clause X of the SPD, the Company was required to enter into Deeds of Cancellation (an example is attached to the SPD) with the remaining Australian employees with respect to the cancellation of the options subject to the ESOP. The parties agreed to terminate the Option Deed and the ESOP Options. The Company agreed to make payments as consideration for the employees' agreement to enter into the Deed of Cancellation. The cancellation payments were based on the fair market value of their entitlements at the time of the sale, and did not include consideration for any future entitlements. The cancellation of the Options in connection with completion of the Transaction fell within 3 years of the grant of all Options issued under the ESOP.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 83A-25. | Income Tax Assessment Act 1997 Section 83A-33. | Income Tax Assessment Act 1997 Section 83A-45.

Reasons for decision: Summary: For the purposes of section 83A-45(4) of the ITAA 1997, the Commissioner will exercise his discretion under paragraph 83A-45(5)(a) to allow the minimum holding period for all Options held by the employees, if any, that qualify for concessional treatment under section 83A-33 to be reduced. The Commissioner will allow the minimum holding period to be the period starting when the Options were acquired and ending at the date on which the Options were cancelled in connection with a 100% acquisition of the shares in the Company. | Detailed Reasoning - Detailed Reasoning: In order to qualify for the ESS start-up concessions under section 83A-33 of the ITAA 1997, the options must meet all of the conditions set down in subsection 83A-33(1). One of the conditions is the minimum holding period requirement which is detailed in subsections 83A-45(4) and 83A-45(5) of the ITAA 1997. | Detailed Reasoning - Minimum holding period: Subsection 83A-45(4) of the ITAA 1997 states that: The minimum holding period condition is satisfied if 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 interests minimum holding period. Subsection 83A-45(5) of the ITAA 1997 states that: An ESS interest's minimum holding period is the period starting when the interest is acquired under the employee share scheme and ending at the earlier of: (a) 3 years later, or such earlier time as the Commissioner allows if the Commissioner is satisfied that: (i) the operators of the scheme intended for subsection (4) to apply to the interest during the 3 years after the acquisition of the interest; and (ii) at the earlier time that the Commissioner allows all membership interests in the relevant company were disposed of under a particular scheme: (b) when the acquirer of the interest ceases being employed by the relevant employer. The Commissioner needs be satisfied that a minimum holding period of less than three years is appropriate in the circumstances. To do this the Commissioner must be satisfied that: 1. all the membership interests in the company will be acquired under the takeover 2. the operators of the scheme intended for Subsection 83A-45(4) to apply to the interest during the 3 years after the acquisition of the ESS interest. | Detailed Reasoning - Application: Given that all the membership interests in the Company are acquired under the takeover, and as part of this, all Options were Cancelled, then the remaining consideration is whether the operators of the scheme intended for subsection 83A-45(4) of the ITAA 1997 to apply to the interest during the 3 years after the acquisition of the interest. The operators of the scheme would fail the test if they had either allowed a participant to dispose of their interest prior to the end of its minimum holding period or there was objective evidence that the scheme was not operated to prevent the participants from doing so. As the rules of the ESOP specifically prevent disposals under these circumstances and there is no evidence that any such disposal has been allowed the only remaining consideration is whether there was objective evidence that the scheme was not operated to prevent the participants from disposing of their interests before the end of the minimum holding period. Objectively the Commissioner would not accept that that the scheme was operated to prevent the participants from disposing of their interests before the end of the minimum holding period where interests were allocated after the time that it became clear that a takeover was imminent. As the evidence indicates that this is not the case the Commissioner will exercise his discretion to allow the reduced minimum holding period to apply.

Reasons for decision: These reasons for decision accompany the Notice of private ruling for theTaxpayers. | All legislative references are to the Income Tax Assessment Act 1997 unless stated otherwise .