Private ruling: Employee Share Scheme


Relevant facts and circumstances: The employer is the non-resident head company of a multiple entry consolidated (MEC) group in Australia in which all of the Australian subsidiaries are members. The company has a number of subsidiaries across the world, including Australia, that provide services. The company and its subsidiaries have a number of employees who are employed in Australia and who are eligible to participate in the proposed amended employee share scheme (ESS) (Plan), which is governed by the Rules. It is proposed that the Plan will be amended so that, for Australian employees in the Plan, the Option will lapse after seven years if it is not previously exercised (rather than 10 years, as applies to employees in many other countries). The Rules provide for the grant of an Option to any person who is eligible to be granted an Option under the Rules. Most employees of the group worldwide are eligible to participate in the Plan unless: (i) they are part of a defined group of senior employees; (ii) they have not satisfied the minimum employment term (two years); or (iiii) the company they work for is not a wholly owned subsidiary. Options are granted to each eligible employee per annum. An Option is a right to acquire Shares (being ordinary shares in the capital of the company). The number of shares in respect of which Options may be granted under the Plan shall not exceed 10% of the issued ordinary share capital of the Company. Any Option granted under the Plan shall be limited and take effect so that the limits in Clauses are complied with. The exercise price of an Option is the lower of the two prices shown for Shares on the London Stock Exchange on the Grant Date plus one quarter of the difference between them. An Option will first become exercisable on the date: (a) that is on or after the third anniversary of the Grant Date (or, if Rules apply; e.g. cessation of employment due to injury or disability, that is within the relevant exercise period); and (b) on which the market value of the Shares is at least 10% above their market value at the Grant Date; and (c) that is within a period that the Board permits exercise of Options (Trading Window), unless this requirement is waived. An Option is not exercisable if all relevant conditions stated above are not tested and satisfied on the same date before the Options lapses (which is either on the seventh anniversary of its Grant Date or, where Rules apply, the end of the relevant exercise period). The Rules of the Plan provides for specified periods of time when Options may be exercised taking into consideration the Foreign listing Authority's rules as to when shares in a Foreign listed company may be traded. These periods are referred to as Trading Windows. There are prescribed prohibited periods of trade known as "close periods" which apply in the weeks before a company's financial results are announced or during a period there is another significant event (which may affect share price) taking place, but where information in respect of that event is not within the public domain. An Option is not transferable (other than to a personal representative of the Employee to enable the Option to be exercised after the Participant dies in accordance with Rules). An Option will lapse if a Participant ceases to be a director or employee of a Group Member, other than by reason of his death, injury or disability within six months of the Grant Date unless the Board shall determine otherwise. An Option may not be exercised if a Participant ceases employment before the Option has been exercised (and is effectively forfeited). In limited circumstances the Option may be exercised notwithstanding cessation of employment (e.g. where the Participant ceases employment because of death, injury or retirement). If a Participant ceases to be a director or employee by reason of injury or disability, or by reason only that his office or employment is in a company which ceases to be a Group Member, or relates to a business or part of a business which is transferred to a person who is not a Group Member ; subject to all conditions being satisfied, the Option may be exercised within six months of the Participant so ceasing (i.e. the exercise period); If a Participant ceases to be a director or employee by reason of retirement on or after reaching the retirement age (if any) as specified in his contract of employment (or, if there is no such age, if he retires at all) in each case more than six months after the Grant Date; subject to all conditions being satisfied, the Option may be exercised within six months of the Participant so ceasing (i.e. the exercise period); If a Participant ceases to be a director or employee for any other reason, including by reason of redundancy the Option may not be exercised at all unless the Board shall so permit, it may; subject to all conditions being satisfied, be exercised to the extent permitted by the Board within six months of the Participant so ceasing (i.e. the exercise period); In relation to Options granted, Australian Participants are expected to utilise a cashless exercise facility operated by brokers, which will enable them to exercise their Options and instruct brokers to sell the Shares issued on their behalf and to distribute the sale proceeds to them. The brokers will only allow an Option to be exercised under the exercise and sale facility if the market value of the Shares has increased by at least 10% since the Grant Date. The condition that the Shares must have increased in value by at least 10% since the grant of the Option applies so that the cashless exercise facility can be administered cost-effectively by brokers. The company proposes to formalise the performance condition for all Australian resident Participants in the Rules and make use of the brokers' exercise and sale facility. Therefore, Australian resident Participants will only be able to exercise Options after the third anniversary of the Grant Date (or earlier in the limited circumstances provided for in Rules if the market value of the Shares the subject of the Option has increased by at least 10% since the Grant Date and any other relevant conditions have been satisfied (e.g. the Board has communicated to Participants that they may exercise their Options).


Reasons for decision: Summary: Will a reporting requirement arise in relation to an Option issued under the Plan at the earliest of the following times? (i) a participant ceasing employment; (ii) the first occasion when all of the relevant conditions for exercise of the Option have been satisfied; (iii) the end of the seven year period starting when the Option is granted. | Detailed Reasoning - Answers: Paragraph 392-5(1)(b) (TAA) requires the provider to give the Commissioner and an Employee a statement where the provider had provided ESS interests to which Subdivision 83A-C (ITAA 1997) applies and the ESS deferred taxing point for the interests occurs during the financial year. Section 83A-105 (ITAA 1997) in Subdivision 83A-C sets out the conditions that must be satisfied to be able to defer the inclusion in assessable income of any discount received on the acquisition of ESS interest until the financial year in which the ESS deferred taxing point occurs. A reporting obligation will arise under paragraph 392-5(1)(b) (TAA) as the relevant conditions have been met (i.e. ESS interests have been provided to the individual in the form of Options to acquire shares; Subdivision 83A-C (ITAA 1997) will apply to the interests as they meet the conditions set down in Subsection 83A-105; and the earliest occurrence of any of the events detailed above would constitute a deferred taxing point in respect of the ESS interest). | Detailed Reasoning - Question 2: Where an Option issued under the plan never satisfies the relevant conditions for exercise and the Option is forfeited or lost, will a reporting obligation arise under Division 392 of the TAA as a result of the application of section 83A-310 (ITAA 1997)? | Detailed Reasoning - Answers: Where the Option is forfeited or lost in the same year that the deferred taxing point occurs no reporting obligation arises as Division 83A (ITAA 1997) (apart from Subdivision 83A-E) is taken never to have applied to the Option. Subsection 392-10 (TAA) requires a provider who becomes aware or any material change or omission in any information given to the Employee or Commissioner under Division 392 tell the individual or Commissioner of the change, or to give the omitted information, in the approved form within 30 days of becoming aware of the change or omission. Where the Option is forfeited or lost in a year subsequent to the deferred taxing point, Division 83A (ITAA 1997) (apart from Subdivision 83A-E) is taken never to have applied to the Option. As this represents a material change to the individual's tax consequences, the employer would be obliged to provide details of the changes to the individual and the Commissioner within 30 days of becoming aware of the changes in accordance with section 392-10 (TAA). | Detailed Reasoning - Question 3: For the purposes of determining when a reporting obligation arises under Division 392 (TAA) when will section 83A-310 (ITAA 1997) apply to an Option issued under the Plan? | Detailed Reasoning - Answers: Division 83A (ITAA 1997) is taken never to have applied (except for subdivision 83A-E) in relation to an ESS interest where: · an amount has been or would be included in the Participant's assessable income; · the Participant has either forfeited the ESS interest, or in the case of a right, the Participant has lost the right without having disposed of or exercised it; and · the forfeiture or loss is not the result of a choice made by the Participant (except where the choice was to cease employment), and nor is the result of a condition of the scheme that has the direct effect of wholly or partly protecting the employee from a fall in the market value of the ESS interest. A Participant's Option would be lost or forfeited for the purposes of section 83A-310 (ITAA 1997) when under the terms of the Plan the Participant no longer had the right to exercise the Option. However, section 83A-310 (ITAA 1997) will not apply where the forfeiture or loss was the result of a choice made by the individual (other than a choice to cease particular employment) (paragraph 83A-310 (c)(i)) Under the Plans rules Participants may lose or forfeit their Options in a number of circumstances including cessation of employment and at the end of the seven year period commencing when the Options were granted. Where at any stage the Participant was entitled to exercise the Option section 83A-310 (ITAA 1997) would not apply. Where, however (disregarding section 83A-310 (ITAA 1997) an amount had been included in a Participant's assessable income under Division 83A and because of the operation of the Plan rules the Participant was at no time able to exercise the Option prior to it being lost or forfeited, section 83A-310 would apply and Division 83A (apart from Subdivision 83A-E) would be taken never to have applied in relation to the lost or forfeited Option. In particular where because of the operation of the relevant Rules (i.e. an Option may not be exercised before the third anniversary of the Grant Date (or earlier in the limited circumstances provided for in Rules) and then only if any relevant condition is satisfied (including the proposed performance condition and exercise permitted by the Board) an Option is never able to be exercised prior to being lost or forfeited then section 83A-310 (ITAA 1997) applies and Division 83A (apart from Subdivision 83A-E) is taken never to have applied to the Option. However, where each of the relevant conditions is met simultaneously (e.g. the third anniversary of the Grant Date has passed and the performance condition is met or exceeded during a period where exercise is permitted by the Board) in relation to an Option it would be taken to be able to be exercised and section 83A-310 (ITAA 1997) could not apply to the Option in accordance with sub-paragraph 83A-310(c)(i) because the forfeiture or loss is the result of a choice made by the individual not to exercise the Option.. | Detailed Reasoning - Relevant facts and circumstances: The employer is the non-resident head company of a multiple entry consolidated (MEC) group in Australia in which all of the Australian subsidiaries are members. The company has a number of subsidiaries across the world, including Australia, that provide services. The company and its subsidiaries have a number of employees who are employed in Australia and who are eligible to participate in the proposed amended employee share scheme (ESS) (Plan), which is governed by the Rules. It is proposed that the Plan will be amended so that, for Australian employees in the Plan, the Option will lapse after seven years if it is not previously exercised (rather than 10 years, as applies to employees in many other countries). The Rules provide for the grant of an Option to any person who is eligible to be granted an Option under the Rules. Most employees of the group worldwide are eligible to participate in the Plan unless: (i) they are part of a defined group of senior employees; (ii) they have not satisfied the minimum employment term (two years); or (iiii) the company they work for is not a wholly owned subsidiary. Options are granted to each eligible employee per annum. An Option is a right to acquire Shares (being ordinary shares in the capital of the company). The number of shares in respect of which Options may be granted under the Plan shall not exceed 10% of the issued ordinary share capital of the Company. Any Option granted under the Plan shall be limited and take effect so that the limits in Clauses are complied with. The exercise price of an Option is the lower of the two prices shown for Shares on the London Stock Exchange on the Grant Date plus one quarter of the difference between them. An Option will first become exercisable on the date: (a) that is on or after the third anniversary of the Grant Date (or, if Rules apply; e.g. cessation of employment due to injury or disability, that is within the relevant exercise period); and (b) on which the market value of the Shares is at least 10% above their market value at the Grant Date; and (c) that is within a period that the Board permits exercise of Options (Trading Window), unless this requirement is waived. An Option is not exercisable if all relevant conditions stated above are not tested and satisfied on the same date before the Options lapses (which is either on the seventh anniversary of its Grant Date or, where Rules apply, the end of the relevant exercise period). The Rules of the Plan provides for specified periods of time when Options may be exercised taking into consideration the Foreign listing Authority's rules as to when shares in a Foreign listed company may be traded. These periods are referred to as Trading Windows. There are prescribed prohibited periods of trade known as "close periods" which apply in the weeks before a company's financial results are announced or during a period there is another significant event (which may affect share price) taking place, but where information in respect of that event is not within the public domain. An Option is not transferable (other than to a personal representative of the Employee to enable the Option to be exercised after the Participant dies in accordance with Rules). An Option will lapse if a Participant ceases to be a director or employee of a Group Member, other than by reason of his death, injury or disability within six months of the Grant Date unless the Board shall determine otherwise. An Option may not be exercised if a Participant ceases employment before the Option has been exercised (and is effectively forfeited). In limited circumstances the Option may be exercised notwithstanding cessation of employment (e.g. where the Participant ceases employment because of death, injury or retirement). If a Participant ceases to be a director or employee by reason of injury or disability, or by reason only that his office or employment is in a company which ceases to be a Group Member, or relates to a business or part of a business which is transferred to a person who is not a Group Member ; subject to all conditions being satisfied, the Option may be exercised within six months of the Participant so ceasing (i.e. the exercise period); If a Participant ceases to be a director or employee by reason of retirement on or after reaching the retirement age (if any) as specified in his contract of employment (or, if there is no such age, if he retires at all) in each case more than six months after the Grant Date; subject to all conditions being satisfied, the Option may be exercised within six months of the Participant so ceasing (i.e. the exercise period); If a Participant ceases to be a director or employee for any other reason, including by reason of redundancy the Option may not be exercised at all unless the Board shall so permit, it may; subject to all conditions being satisfied, be exercised to the extent permitted by the Board within six months of the Participant so ceasing (i.e. the exercise period); In relation to Options granted, Australian Participants are expected to utilise a cashless exercise facility operated by brokers, which will enable them to exercise their Options and instruct brokers to sell the Shares issued on their behalf and to distribute the sale proceeds to them. The brokers will only allow an Option to be exercised under the exercise and sale facility if the market value of the Shares has increased by at least 10% since the Grant Date. The condition that the Shares must have increased in value by at least 10% since the grant of the Option applies so that the cashless exercise facility can be administered cost-effectively by brokers. The company proposes to formalise the performance condition for all Australian resident Participants in the Rules and make use of the brokers' exercise and sale facility. Therefore, Australian resident Participants will only be able to exercise Options after the third anniversary of the Grant Date (or earlier in the limited circumstances provided for in Rules if the market value of the Shares the subject of the Option has increased by at least 10% since the Grant Date and any other relevant conditions have been satisfied (e.g. the Board has communicated to Participants that they may exercise their Options).

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