Private ruling: Employee Share Scheme - Deferred Taxing Point - Genuine Restriction
Published: June 2012
Ruling period: Year ending 2011 | Year ending 2012.
Date scheme commenced: 1 July 2009.

Ruling: Q1: Are the conditions of an Employee Share Scheme overridden by a Company Share Trading policy adopted after the granting of options? | A1: No. | Q2: Do other trading restrictions cover the options issued and alter the deferred taxing point reported to the ATO by the company? | A2: Yes.

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. Options were granted and were directly issued to a trust. The trust became the legal owners of the options. The Company Share Trading Policy was adopted by the board after options were granted. A takeover was launched for the company. The takeover date became the deferred taxing point and options vested on this date. Trading in X before the takeover was launched had been completed by the employee who believed that they were not in possession of information that would be deemed "inside information". The employee was in possession of specific information during the takeover period which would be classified as "inside information" and prevent the trading of X due to insider trading regulations. No employee of the company directly involved with the takeover process should trade X - this was endorsed by the members of the takeover defence committee hence none of these officials traded during this period. Employment ceased with the company and no options were exercised that were granted to the trust.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 83A | Income Tax Assessment Act 1997 Subdivision 83A-C | Income Tax Assessment Act 1997 Section 83A-120

Reasons for decision: Summary: As a general rule, a discount you obtain on shares you acquire through an ESS is included in your assessable income at some point in time. Usually, this will either be the income year in which you acquire shares under an ESS, or at a later time depending on the circumstances applicable to particular cases. Subdivision 83A-C Income Tax Assessment Act (ITAA) 1997 contains rules for when the discount received on the acquisition of shares through an ESS is included in a taxpayer's assessable income and how the discount is determined. The deferred taxing point is determined in accordance with the provisions of section 83A-120 of the ITAA 1997. The Tax Laws Amendment (2009 Budget Measures No. 2) Bill 2009 that came into affect on 1 July 2009 stated at paragraph 1.197 the following: - The restriction and conditions covered by the deferred taxing points are only those that existed when the employee acquired the ESS interest. Conditions and restrictions that have been added subsequent to acquisition are ignored for the purposes for determining the deferred taxing point. The genuine disposal restrictions as per the ATO website state the following: - For a restriction to be a genuine disposal restriction it must be in the conditions of the ESS when the employee acquires the ESS interest. For a share that an employee acquires on exercise of a option that is an ESS interest, the disposal restriction must have been in place when the employee acquired the option. | Detailed Reasoning - Your situation: The ESS options were granted before the Company Share Trading policy was adopted by the board. The Company Share Trading policy that introduced the genuine restrictions will not override the ESS for the deferred taxing point as it was not in existence when the options were granted. | Detailed Reasoning - Question 2: The restrictions regarding the trading of shares by a person with access to price sensitive information operate under the framework of the: · Australian Securities Exchange (ASX) Listing Rules which govern trading in shares of Companies and, · Corporations Act 2001(Cth)(Act), which prohibits insider trading by anyone. The Tax Laws Amendment (2009 Budget Measures No. 2) Bill 2009 that came into affect on 1 July 2009 stated at paragraph 1.192 the following: - · Genuine restrictions preventing disposal could include a condition of the scheme that contractually prevents disposal of shares. If disposing of an ESS interest would be a criminal offence, for example under a law regulating insider trading, then the employee would also be considered genuinely restricted from disposing of the share. The employer reporting of a genuine disposal restriction as per the ATO website state the following for example 12: - | Detailed Reasoning - Employer reporting - insider trading policy requires board approval: A Co. operates a tax-deferred scheme. The Co. must give an ESS statement to its employees and an ESS annual report to the ATO for the income year in which the deferred taxing point for the rights occurs. For reporting purposes, the Co. needs to take reasonable steps to identify accurately when the deferred taxing point arises. Division 83A of the ITAA 1997 applies to shares and options to acquire shares that are granted after 1 July 2009 and also to shares and options granted before 1 July 2009 that was subject to income tax deferral past this date. The deferred taxing point for options is determined in accordance with the provisions of section 83A-120 of the ITAA 1997. Subsection 83A-120(2) of the ITAA 1997 defines the deferred taxing point of shares that had selling restrictions and forfeiture conditions to be the earliest of the following subsections: · No restrictions on disposing of share · 83A- 120(4) the first possible taxing point is the earliest time when: · you have not exercised the option; and · there is no real risk that, under the conditions of the employee share scheme, you will forfeit or lose the ESS interest (other than by disposing of it, exercising the option or letting the option lapse); and · if, at the time you acquired the ESS interest, the scheme genuinely restricted you immediately disposing of the ESS interest - the scheme no longer so restricts you. | Detailed Reasoning - Cessation of employment: 83A- 120(5) the 2nd possible taxing point is the time when the employment in respect of which you acquired the interest ends. | Detailed Reasoning - Maximum time period for deferral: 83A- 120(6) the 3rd possible taxing point is the end of the 7 year period starting when you acquired the interest. | Detailed Reasoning - No restrictions on exercising option and disposing of share: 83A-120(7) the 4th possible taxing point is the earliest time when: · there is no real risk that, under the conditions of the scheme, you will forfeit or lose the ESS interest (other than by disposing of it, exercising the option or letting the option lapse); and · if, at the time you acquired the ESS interest, the scheme genuinely restricted you immediately exercising the option - the scheme no longer so restricts you; and · there is no real risk that, under the conditions of the scheme, if you exercise the option, you will forfeit or lose the beneficial interest in the share (other than by disposing of it); and · if, at the time you acquired the ESS interest, the scheme genuinely restricted you immediately disposing of the beneficial interest in the share if you exercised the option - the scheme no longer so restricts you. | Detailed Reasoning - Your situation: A takeover of the company was launched and the company formed an opinion that the effective vesting date would become the takeover date. The employee was in possession of specific information during the takeover period which would be classified as "inside information" and prevent the trading of X due to insider trading regulations. No employee of the company directly involved with the takeover process should trade X - this was endorsed by the members of the takeover defence committee hence none of these employee traded X during this period. The deferred taxing point reported to the employee and the ATO should not have been determined until when the restrictions had lifted and the employee had notified the relevant personnel that the employee was in a position to trade. The employee indicated this did not occur for the entire takeover period therefore confirming that the deferred taxing point should not have been reported.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.