Private ruling: Employee share schemes
Date of advice: 7 October 2020
Published: February 2021
Ruling period: For the year ended 30 June 201Y
Date scheme commenced: 1 July 201X

Ruling: Q1: For the purpose of section 960-410 of the Income Tax Assessment Act 1997 (ITAA 1997), do you need to disregard the X Conditions when determining the market value of the Xs at the ESS deferred taxing point? | A1: Yes | Q2: For the purpose of section 960-410 of the ITAA 1997, do you need to disregard the Y Conditions when determining the market value of the Ys at the ESS deferred taxing point? | A2: Yes | Q3: For the purpose of section 960-410 of the ITAA 1997, do you need to disregard the fact that Ys do not participate in dividends (as compared to the corresponding A shares which does) when determining the market value of the Ys at the ESS deferred taxing point? | A3: Yes | Q4: In the event that the X Conditions are not met, will section 83A-310 of the ITAA 1997 operate to treat Division 83A of the ITAA 1997 as never having had effect with respect to the Xs? | A4: No | Q5: In the event that the Y Conditions are not met, will section 83A-310 of the ITAA 1997 operate to treat Division 83A of the ITAA 1997 as never having had effect with respect to the Ys? | A5: Yes, where performance hurdles are not met and the Y is lost or forfeited as a result.

Relevant facts and circumstances: You were an executive director of A from I January 200J and retired from this position on H June 201Y. At the time of retirement, you were the holder of Xs and Ys issued under the terms set out in C. The C is an employee share scheme (ESS) and its terms are broadly described in Class Ruling 201P/7P (CR 201P/7P). The Xs and Ys issued to you under the C are ESS interests. Xs are beneficial interests in B shares held in the C Trust. X holders are entitled to receive any dividends, distribution or other entitlement in respect of shares held by the C Trustee on their behalf on the record date for determining entitlements to the relevant payment regardless of whether or not the Xs are vested or unvested. Ys are zero exercise price options to acquire shares in B are not transferable. Y do not carry rights to dividends or dividend equivalent amounts (DEAs). The relevant terms of the Xs and Ys are set out in the following documents: • Offer Flyer • General Booklet • Profit Booklet 201X • C • C Rules • Retirement Letter. Cessation of employment Upon cessation of your employment, any Ys or Xs still subject to a vesting period (which may include a minimum employment term and/or performance hurdles, in the case of the Ys), would have been forfeited. However, in accordance with the rules of the C, the Board of A ( Board ) agreed to exercise its discretion to allow Ys to continue to vest in accordance with their original vesting schedules. In addition, the Board also agreed to exercise its discretion to accelerate the release of the Retained Directors' Profit Share (DPS) (partially made up of interests in the C issued as Xs). Depending upon what year the Retained DPS related to, each was to be released upon expiry of a certain period following retirement. Retained DPS related to pre 201K, 201L and 201M was to be released on expiry of the first x month period following retirement. DPS related to the 201X year was to be released upon expiry of a further x months following the end of the first x month period. DPS related to the 201Y year was to be released upon expiry of a further y months following the end of the first y month period after retirement. Release of the DPS was subject variously to Disqualifying Events, Malus Events or Post Employment Events not occurring during employment or the relevant period (x, y or z months) following retirement. However, A also agreed to exercise its discretion and accelerate the vesting of Retained DPS Equity Awards (held in the C Trust as Xs) equivalent in value to the amount of the tax liability which was to arise on the termination of employment in respect of the Xs. The trustee of the C was instructed to release corresponding equity in B (B Shares) to you as soon as possible following termination of employment. In the event that a Disqualifying Event, Malus Event and/or Post Employment Event (as relevant) has occurred during your employment or the first x months following retirement, you agree to repay to A the 'Adjusted Tax Amount' (that is, the Estimated Tax Liability Amount less the value of any Retained DPS Equity Awards that would have already been released). At retirement, you held 1P,PPP Ys relating to the 201K awards, 4Q,QQQ Ys relating to the 201L awards, 3R,RRR Ys relating to the 201M awards and 2S,SSS Ys relating the 201X awards. As noted above, A exercised its discretion to enable you to retain all these Ys. According to the Retirement Letter, each of the tranches of Y were made subject to different vesting dates. The Y remained subject to related performance hurdles measured at the calendar quarter end immediately preceding vesting. In accordance with the vesting dates, Ys would variously vest from 1 July 201Y through to 1 July 202V. As at the 2Y June 201Y, you were also entitled to retain 4TT,TTT equity awards under the C (Xs). Restrictions imposed There were a number of terms and conditions that continued to apply to some of the Xs and Ys upon cessation of employment, summarised as follows: Name of the ESS Interest Year related to Conditions existing upon retirement Retained DPS Equity Award - X Pre 201D Released after x months from the retirement date. Subject to "Disqualifying Events" set out in the 2013 Profit Booklet (x months) Immediate release of partial award to satisfy tax liability. Retained DPS Equity Award - X 201D, 201L, 201M Released after x months from the retirement date. Subject to Malus Events and Post Employment Events happening in same x month period set out in the 201X Profit Booklet and also the letter to you dated J October 201X (relating to the Post Employment Event provisions). Immediate release of partial award to satisfy tax liability. Retained DPS Equity Award - X 201X Released after y months. Subject to Malus Events and Post Employment Events happening in same y month period set out in the 201X Profit Booklet and also the letter to you dated J October 201X (relating to the Post Employment Event provisions). Immediate release of partial award to satisfy tax liability. Retained DPS Equity Award - X 201Y Released after x months Subject to Malus Events and Post Employment Events happening in same z month period set out in the 201X Profit Booklet and also the letter to you dated J October 201X (relating to the Post Employment Event provisions). Immediate release of partial award to satisfy tax liability. Y 201K Vesting date: 1 July 201Y Subject to Performance Hurdles, measured the quarter before vesting. Y 201L Vesting date: 1 July 201Y & 1 July 202N Subject to Performance Hurdles, measured the quarter before vesting. Y 201M Vesting date: 1 July 202N & 1 July 202G Subject to Performance Hurdles, measured the quarter before vesting. Y 201X Vesting date: 1 July 202G & 1 July 202F Subject to Performance Hurdles, measured the quarter before vesting. X conditions According to paragraph w in CR 201P/7P, there is no right to withdrawal of B shares upon retirement. However, where a participant is retiring and they have a record of sustained contribution and commitment to A over a considerable period of time, A may, in its absolute discretion in appropriate circumstances and on termination of the employment, accelerate the vesting period of the Xs such that they are not forfeited. In your case, where ordinarily you would have been required to foreit your Xs upon cessation of employment if this occurred prior to the vesting periods being satisfied, it appears that the Board exercised its discretion and accelerated the vesting periods to enable you to retain the X's after your employment had ceased. Upon cessation of empoyment (that is, retirement), the only conditions left attached to the Xs were the Malus and the Post Employment provisions below. As outlined in the 201X Profit Booklet, the following malus and non-compete conditions apply to the Xs (X conditions) to be awarded to you: Malus Event The Board may, in its absolute discretion at any time, reduce (by such amount as the Board determines appropriate) or eliminate in full, the Retained Executive Directors' profit share (DPS) awarded in respect of 201K and subsequent years to an identified Executive Director or Departing Executive Director if it determined that the Executive Director has at any time: (a) acted dishonestly (including, but not limited to, by misappropriating funds or deliberately concealing a transaction); (b) acted or failed to act in a way that contributed to a breach of a significant legal or significant regulatory requirement relevant to A; (c) acted or failed to act in a way that contributed to B, A Limited or any Group within A incurring: - significant reputational harm; and/or - a significant unexpected financial loss, impairment charge cost or provision; or (d) acted or failed to act in a way that contributed to B or A Limited making a material financial restatement. ... Post Employment [Non-compete] Event The Board may, in its absolute discretion at any time, reduce (by such amount as the Board determines appropriate) or eliminate in full the Retained DPS of a Departing Executive Director if it determines that the Executive Director has at any time earlier: (a) taken staff to a competitor of A or been instrumental in casing staff to go to a competitor of A; or (b) joined a competitor of A or otherwise been engaged by, or participated in, a business that competes with A... Y conditions As outlined in the Offer Flyer, the following performance conditions apply to the Ys (Y conditions) to be awarded to you: Performance Hurdle 1 - B Return on Equity (ROE) compared with equivalent companies in a defined 'Reference Group' Under this condition, and subject to clause 3.14 ('Relevant requirements, Non-Disposal Period, Exercise Conditions, Vesting Period') of the C Rules, the number of Ys comprising 50 per cent of a vested tranche which may be exercised will be determined by reference to the average annual ROE of A calculated over the three or four most recent consecutive Financial Years of A terminating at the Performance Dates, as appropriate. Performance Hurdle 2 - Earnings Per Share (EPS) growth rate (CAGR) Under this condition, and subject to clause 3.14 ('Relevant requirements, Non-Disposal Period, Exercise Conditions, Vesting Period') of the C Rules, the number of Ys comprising 50 per cent of a vested tranche which may be exercised will be determined by reference to A's EPS compound annual growth rate (CAGR) calculated over the three or four most recent consecutive Financial Years of Macquarie terminating at the Performance Date, as applicable. Calculating the value of restrictions You received an ESS Annual Tax Statement for Xs (for the period 1 July 201X to 30 June 201Y) and an ESS Annual Tax Statement for Ys (for the period 1 July 201X to 30 June 201Y) and both makes reference to the market value of a B share at the taxing point close price. The value of a X and Y can be referenced (and compared) to a B share for valuation purposes, noting that the key differences with a B share are contained in the X conditions and Y conditions referred to above. According to the Retirement Letter, A has also agreed to exercise its discretion to accelerate the vesting of retained DPS Equity Awards (Xs) equivalent in value to the amount of the estimated tax liability which will arise on the cessation of your employment (that is, at your retirement date) and instructed the Trustee of C to release the corresponding equity (B shares) as soon as possible following termination. However, in the event that A determines in its absolute discretion that a Disqualifying Event or X conditions have occurred during your employment or during the first six months after your retirement date, you must repay to A the Adjusted Tax Amount. The Retirement Letter provides in relation to the Ys that they will only vest if the Y conditions (outlined above) have been met. The number of Ys ultimately released (or that will become exercisable to you) will be determined based on the achievement of the related Y conditions (that is, meeting the Performance Hurdles), measured as of the calendar quarter and immediately preceding vesting. Assumptions Xs and Ys are 'ESS interests' within the meaning of that term in subsection 83A-10(1) of the ITAA 1997. The C is an 'ESS' within the meaning of that term in subsection 83A-10(2) of the ITAA 1997. The Xs and Ys are ESS interests that meet the necessary conditions in section 83A-105 of the ITAA 1997 which entitles them to access deferral taxation. The following assumptions are also made in respect of the C Trust Deed: (a) the terms used in the C Trust Deed are materially the same as those used in the C Rules; (b) the Trustee of the C Trust has not exercised a power under the C Trust Deed to change or otherwise alter the rights and obligations attaching to the Xs or Ys.

Relevant legislative provisions: 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 subsection 83A-115(5) | Income Tax Assessment Act 1997 subsection 83A-120(5) | Income Tax Assessment Act 1997 section 83A-315 | Income Tax Assessment Act 1997 section 83A-330 | Income Tax Assessment Act 1997 section 960-410 | Income Tax Assessment Act 1997 subsection 995-1(1) | Income Tax Assessment Regulations 1997 regulation 83A-315.01

Reasons for decision: Summary: The X conditions outlined above need to be disregarded when determining the market value of the Xs at the ESS deferred taxing point. | Detailed Reasoning - Deferred taxation: Subdivision 83A-C of the ITAA 1997 provides, broadly, for assessment of a discount to you of an ESS interest at the earliest 'ESS deferred taxing point'. In order for Subdivision 83A-C of the ITAA 1997 to apply, the various conditions in section 83A-105 of the ITAA 1997 must be satisfied. In the event that the conditions in section 83A-105 of the ITAA 1997 are not satisfied, the discount on the ESS interest is instead assessed to you upon issue of the ESS interest. We have assumed, for the purposes of this private ruling, that the relevant interests, being the Xs and Ys are ESS interests that have satisfied the conditions in section 83A-105 of the ITAA 1997 and any discount on either type of interest will arise at a deferred point. Section 83A-110 of the ITAA 1997 determines the amount to be included in your assessable income at the 'ESS deferred taxing point': 83A-110(1) Your assessable income for the income year in which the *ESS deferred taxing point for the *ESS interest occurs includes the *market value of the interest at the ESS deferred taxing point, reduced by the *cost base of the interest. | Detailed Reasoning - Note:: Regulations made for the purposes of section 83A-315 may substitute a different amount for the market value of the ESS interest. 83A-110(2) Treat an amount included in your assessable income under subsection (1) as being from a source other than an *Australian source to the extent that it relates to your employment outside Australia. | Detailed Reasoning - Note:: For the CGT treatment of employee share schemes, see Subdivision 130-D. Sections 83A-115 and 83A-120 of the ITAA 1997 each determine the 'ESS deferred taxing point' for a share and right, respectively. In accordance with subsection 83A-120(5), the 'ESS deferred taxing point' for both the X and Y is the time when employment in respect of which the acquired interest ends. Section 83A-330 of the ITAA 1997 provides that, for the purposes of Subdivision 83A-C of the ITAA 1997, you are treated as 'ceasing employment' when you are no longer employed by any of the following: (a) your employer in that employment; (b) a holding company (within the meaning of the Corporations Act 2001 ) of your employer; (c) a *subsidiary of your employer; (d) a *subsidiary of a holding company (within the meaning of the Corporations Act 2001 ) of your employer. Therefore, at the time of cessation of employment, the 'ESS deferred taxing point' arose in relation to the X and Y under section 83A-120 of the ITAA 1997. At that time, the amount to be included in your assessable income was determined by section 82A-110 of the ITAA 1997 to be the market value of the interest (the X and Y) less the cost base. | Detailed Reasoning - Market value of an ESS interest: Section 83A-315 of the ITAA 1997 states the following in relation to the 'market value of ESS interest': 83A-315(1) Whenever this Division (other than section 83A-20) uses the *market value of an *ESS interest, instead use the amount specified in the regulations for the purposes of this section in relation to the interest, if the regulations specify such an amount. 83A-315(2) To avoid doubt, apply the rule in subsection (1) to the *market value component of any calculation for the purposes of this Division that involves market value. | Detailed Reasoning - Example:: If the regulations specify an amount in relation to an ESS interest, use that amount instead of the market value of the interest in working out: (a) whether there is a discount given in relation to [the] interest; and (b) if so - the amount of the discount. Regulation 83A-315.01 of the Income Tax Assessment Regulations 1997 (ITAR 1997) states the following in relation to determining the value of a right: 83A-315.01(1) For subsection 83A-315 of the [ITAA 1997], the amount, in relation to an unlisted right that must be exercised within 15 years after the day when the beneficial interest in the right was acquired is, at the choice of the individual: (a) the market value of the right; or (b) the amount determined by the application of regulations 83A-315.02 to 83A-315.09. 83A-315.01(2) However, if the ESS deferred taxing point for an ESS interest is: (a) the day when the individual disposes of the interest (other than by exercising the right); or (b) if the individual exercises the right - the day when the individual disposes of the beneficial interest in the share; the amount is the market value of the right or share. In circumstances where an employee has an unlisted right and the deferred taxation point arises on cessation of employment, an employee has a choice between two methods - either to use the amount determined by the application of the ITAR 1997 or the market value of the right. In some circumstances, even where an employee opts to use the ITAR 1997, where 'market value' is greater than the amount so calculated under those regulations, the employee is bound to adopt 'market value'. Regulation 83A-315.02(2) of the ITAR 1997 provides that in determining the value of a right, anything that would prevent or restrict conversion of the right to money is to be disregarded. If, at regulation 83A-315.01 of the ITAR 1997, an employee chooses to utilise 'market value', the meaning of 'market value' is modified by Subdivision 960-S of the ITAA 1997. | Detailed Reasoning - Market value of non-cash benefits: Section 960-410 in subdivision 960-S of the ITAA 1997 states in relation to the calculation of 'market value of non-cash benefits' to: ...disregard anything that would prevent or restrict conversion of the benefit to money. The term 'non-cash benefit' is defined in subsection 995-1(1) of the ITAA 1997 as: Except so far as the contrary intention appears... property or services in any form except money. If a non-cash benefit is dealt with on behalf of an entity, or is provided or dealt with as an entity directs, the benefit is taken to be provided to the entity. | Detailed Reasoning - Application of the law: Further to section 83A-110 of the ITAA 1997, you need to work out the market value of the Xs and Ys to determine the assessable amount to be included in your income tax return for the year ended 30 June 201Y. | Detailed Reasoning - Policy intent relating to taxation of ESS interests: The approach of Division 83A of the ITAA 1997 is to recognise that shares and rights to shares should be taxed to an employee as a product of employment. However, it also recognises that there are economic advantages to a business of aligning the interests of employees and shareholders and as such, delivers deferral of taxation (and other tax benefits) on ESS interests whilst employment subsists. This explains why a common taxing point for ESS Interests is ending of employment. At this time, the intention of Division 83A of the ITAA 1997 is to capture the full value of the share or right potentially to be extracted from the scheme and to tax it as revenue in nature (as a product of employment). Whilst there may still be conditions attached to the share or right, the overarching policy intent is to capture the full value that can be extracted from the share or right at the time of ending of employment. This is why, at this time, both the ITAR 1997 (as relating to ESS) and section 960-410 of the ITAA 1997 require us to set aside those conditions to arrive at a value. In the present case, valuation of Ys and Xs upon an employee's exit from employment (in your case, the cessation of employment via retirement) requires the setting aside all of those terms and conditions that might detract from a full valuation of these rights (Ys and Xs). This approach to valuation was introduced into the ESS rules from former subsection 26AAC(18) of the Income Tax Assessment Act 1936 (ITAA 1936), and has subsisted through former section 139FD of the Division 13A of the ITAA 1936 to the current rules. | Detailed Reasoning - Valuation of Ys and Xs: Section 960-410 of the ITAA 1997 provides for how X and Ys may be valued on the basis that they are considered to be 'non-cash benefit(s)'. Section 960-410 of the ITAA 1997 provides for the valuation of Ys and Xs on the basis that the Y conditions and X conditions are disregarded. Section 960-410 of the ITAA 1997 requires us to examine and disregard 'anything' that would prevent or restrict conversion of a non-cash benefit to money. The adoption of the term 'anything' together with the use of words 'prevent', 'restrict' and 'conversion' (rather than narrower and more specific terms like sale or disposal) indicates that a broad range of factors was intended to be captured (and disregarded) by this section. As noted above, we are of the view that section 960-410 of the ITAA 1997 reflects earlier approaches to market valuation of ESS interests as previously contained in the former section 139FD and subsection 26AAC(18) of the ITAA 1936. Interpretation of these earlier provisions is contained in paragraph 15 of IT 2609 Income Tax: Employee Share Acquisition Schemes and discussed briefly by the Federal Court in the decision of Fowler v Federal Commissioner of Taxation 2013 ATC 20-398 at 15037, paragraph 89. In addition, the application of section 960-410 of the ITAA 1997 is contained and described on the ATO's website [1] , as follows: Any method used to determine the market value should have regard to the terms and conditions which apply to the right being valued. However, in working out the market value of the right you must disregard anything which would prevent or restrict conversion of the right to money. For example, where the terms of an ESS impose disposal restrictions or provide for rights to be forfeited in particular circumstances, these factors should be disregarded when determining the market value. In the case of a right such a Y or X, this would include any and all conditions that would prevent the actual sale of the right itself as well as anything that would 'prevent' or 'restrict' an event that would ultimately lead to (or is a condition precedent) to conversion of the right to money (which may also occur through sale of the B share acquired by exercising these rights). If section 960-410 of the ITAA 1997 was intended to be construed restrictively, narrower wording such as 'sale' or 'disposal' would have been adopted instead of 'conversion' and broad terminology such as 'prevent', 'restrict' and 'anything' would also not have been used. Therefore, the Ys or Xs market value must be arrived at, disregarding any restrictions, at the time of cessation of employment (that is, retirement). This will usually relate (directly) to the market value of the underlying share, particularly where there is no exercise price to be paid. If it were the case that section 960-410 of the ITAA 1997 only applied to disregard a small, discrete and narrow set of conditions, this would mean that the value of the ESS interests, having taken into account all of the conditions would, in some cases, be greatly reduced and the amount to be assessed under Division 83A of the ITAA 1997 (and on revenue account) would be minimal. Whilst the CGT rules would capture any subsequent gain (where the interests are held on capital account), this outcome is inconsistent with the policy intent of Division 83A of the ITAA 1997 and its interaction with the CGT rules, more broadly. | Summary: The Y conditions outlined at paragraph 19 above need to be disregarded when determining the market value of the Ys at the ESS deferred taxing point. | Detailed Reasoning - Detailed reasoning: Please refer to paragraphs 1 - 27 above. | Summary: You will need to account for the fact that Ys do not participate in dividends when determining the market value of Ys at the ESS deferred taxing point. | Detailed Reasoning - Detailed reasoning: A lack of access to dividends or DEAs (as Ys are only rights, not the B shares themselves) would not ordinarily be factored into the Y vesting conditions and should not be disregarded for the purposes of market valuation under section 960-410 of the ITAA 1997. | Summary: Where the X conditions are not met (and the Xs are not realised by the taxpayer), section 83A-310 of the ITAA 1997 will not operate to reverse out the ESS benefit that was included in your assessable income. | Detailed Reasoning - Detailed reasoning: As described above, the Xs issued to you have, due to exercise of a discretion by the Board, had vesting periods accelerated. As a consequence, the X's have vested and will be released to you in accordance with the x, y and x month release conditions. In addition, other than in circumstances of a 'Disqualifying Event', 'Malus Event' or 'Post Employment Event', X's are fully vested and will be released to you after the required period of time. The provisions in Division 83A of the ITAA 1997 recognise that in some circumstances, the ESS interest may be lost where conditions precedent to realising that interest are not met. Specifically, in certain circumstances, section 83A-310 of the ITAA 1997 may apply to prevent the application of Division 83A of the ITAA 1997 to an ESS interest if the employee forfeits or loses the interest. However, section 83A-310 of the ITAA 1997 only applies to certain circumstances. For example, where the forfeiture or loss is the result of a choice made by the employee, then section 83A-310 of the ITAA 1997 will not apply. The Explanatory Memorandum to the Tax Laws Amendment (2009 Budget Measures No.2) Bill 2009 (EM) explains that: 1.331 Whether or not forfeiture is as a result of a choice of an employee is something to be assessed on a case-by-case basis. It is considered that in respect of the Xs, if you choose to engage in behaviour or action that results in a 'Disqualifying Event', a 'Malus Event' or a 'Post Employment Event', then section 83A-310 of the ITAA 1997 does not apply to you. This is because you have chosen to engage in action (or inaction) that has resulted in forfeiture of the Xs. | Summary: Where the Ys are lost or forfeited due to a failure to meet performance hurdles, section 83A-310 of the ITAA 1997 operates to reverse out the ESS benefit that was included in your assessable income. | Detailed Reasoning - Detailed reasoning: As described above, the Ys issued to you have, due to exercise of a discretion by the Board, had vesting periods modified. As a consequence, the Ys will be exercisable by you if performance hurdles are satisfied at the vesting time. Performance hurdles are described above and are linked to the financial performance of A. The provisions in Division 83A of the ITAA 1997 recognise that in some circumstances, the ESS interest may be lost where conditions precedent to realising that interest are not met. Specifically, in certain circumstances, section 83A-310 of the ITAA 1997 may apply to prevent the application of Division 83A of the ITAA 1997 to an ESS interest if the employee forfeits or loses the interest. However, section 83A-310 of the ITAA 1997 only applies to certain circumstances. For example, where the forfeiture or loss is the result of a choice made by the employee, then section 83A-310 of the ITAA 1997 will not apply. The EM explains that: 1.331 Whether or not forfeiture is as a result of a choice of an employee is something to be assessed on a case-by-case basis. It is considered that where the Y's are lost or forfeited due to a failure to satisfy performance hurdles, this is not a forfeiture of loss as a result of a choice that you have made. As such, in these circumstances, section 83A-310 of the ITAA 1997 will apply. However, where the Y's are lost or forfeited due to a 'Disqualifying Event', a 'Malus Event' or a 'Post Employment Event', section 83A-310 of the ITAA 1997 will not apply. [1] https://www.ato.gov.au/General/Employee-share-schemes/In-detail/Market-value/Market-value-of-unlisted-rights-to-acquire-listed-shares-and-stapled-securities/