Private ruling: Deferred Taxing Point
Date of advice: 7 November 2017
Published: March 2018
Ruling period: Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017
Date scheme commenced: 1 July 2014

Ruling: Q1: Is the deferred taxing point on the remaining options issued under an employment share scheme (ESS) by a company a specific date? | A1: Yes

Relevant facts and circumstances: Your company, as trustee for a Trust, was engaged by a second company to provide your services as project manager and consultant. Your company invoiced the second company based on an hourly rate. You did not work the same amount of hours each week, or the same amount of days each month. You worked from your home office and also completed work at a remote location. You were granted an amount of employee options under the second company’s Employee Share Scheme. At your direction, half of these options were issued to your associate. You received these options in respect of the employment like relationship you enjoyed with the second company. You received a letter from the second company regarding the taxation liabilities of the granting of these options, which contained the following paragraph: ‘In respect to these options, these options were issued to pursuant to an offer made under an arrangement to which Subdivision 83A-C of the Income Tax Assessment Act 1997 applies. You should seek your own taxation advice as to the assessability of the grant of these options and any taxation arising on the sale of any shares arising from the exercise of these options’. You continued to supply your project management and consultancy services to the second company until a specific date. Although you were available to supply your services beyond this date, you were not called on to do so, and this arrangement ceased from a date. During this time the second company hired a vehicle and equipment from your (Personal Service Entity (PSE). This arrangement commenced in a previous year, and continued beyond the time you ceased your project management and consultancy work. You and your associate exercised some of your options. For a specific year, the second company provided you with an Employee Share Scheme Statement which showed a taxable amount. You requested that the second company explain how this amount was calculated. The second company provided an explanation as follows: The following options were exercised prior to the termination date as follows: ● XXX,XXX options exercised at an amount ● XXX,XXX options exercised at an amount The taxable amount for the remaining options was calculated as of your termination date as follows: ● XXX,XXX options exercised at an amount


Reasons for decision: Summary: The contractual relationship between yourself and the second company, which resulted in you receiving share options in the company’s employee share scheme, was terminated. Accordingly, the correct taxation point is, and remains the date in which you ceased the relationship in respect of which you acquired the employee share scheme interest. The deferred taxing point has been correctly reported in the relevant income tax year. | Detailed Reasoning - Employee relationship: Division 83A of the Income Tax Assessment Act 1997 (ITAA 1997) sets out the rules for employee share schemes (ESS). Section 83A-325 of ITAA 1997 extends ESS to employee-like relationships. The provision refers to relationships similar to employment. A relationship does not need to be a direct contractual connection; it can also encompass a more informal connection between the individual and an entity to which services are provided by the individual. The wording of the provision refers to the ‘arrangement’. The way the term arrangement is defined looks beyond whether an arrangement is enforceable. In other words, an ESS is not confined to formal contracts. If an individual performs services using a Personal Services Entity (PSE) and that entity contracts to provide the services to another entity, we need to look to the relationship (if any) between the individual and that other entity. Whether or not there is a relationship is a question of fact. To determine this we look at whether the individual is known, understood or expected to be the person performing the services. This relationship between the individual and the ultimate receiver of the services stands apart from any contractual arrangement using an interposed entity and therefore an informal relationship between the ultimate receiver of the services and an individual is not excluded from consideration merely because the individual and the interposed entity have a contractual arrangement. The individual has separate relationships with each entity. Where an entity (as ultimate receiver of the services) has provided a specified individual a share, or a right to a share, this is strong evidence of the existence of a relationship between the two. If the provision of that share or right to a share can in any way be connected or related to the provision of services by the individual, it is a relationship similar to employment. Where a relationship similar to employment is found to exist, an associate of the individual can receive the ESS interests in their place. | Detailed Reasoning - Taxation of ESS interests: The default taxation position of a taxpayer who acquires an ESS interest under an ESS at a discount to market value is taxed on the discount at the time of the acquisition (Subdivision 83A-B of the ITAA 1997). Subdivision 83A-C of the ITAA 1997 provides that where certain conditions are satisfied, the discount in relation to a beneficial interest in a share is not included in an employee's assessable income when they acquire the interest. Instead, under section 83A-110 of the ITAA 1997 the assessable income of the employee will include, at a later time, the market value of the interest at the ESS deferred taxing point reduced by the cost base of the interest. Section 83A-120 of the ITAA 1997 explains that when deferred taxation applies to a right to acquire a beneficial interest in a share is the earliest of the following times 1. The first possible taxing point is the earliest time when: a. You have not exercised the right; and b. 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 right or letting the right lapse); and c. 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. 2. The 2nd possible taxing point is the time when the employment in respect of which you acquired the interest ends. 3. The 3rd possible taxing point is the end of the 15 year period starting when you acquired the interest. 4. The 4th possible taxing point is the earliest time when: d. You exercise the right; and e. (Repealed) f. there is no real risk that, under the conditions of the scheme, after exercising the right, you will forfeit or lose the beneficial interest in the *share (other than by disposing of it); and g. 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 right - the scheme no longer so restricts you. If the taxpayer disposes of the ESS interest within 30 days after the time worked out under the above rules, the ESS deferred taxing point is moved to the time of that disposal | Detailed Reasoning - Your position: You contend that the exercise date for the remaining options is incorrect as you believe that you were still employed by the second company. You suggest that a continuing employee type relationship remains ongoing because of a separate arrangement that provides a ‘service’ to the second company by supplying a vehicle and equipment based on a verbal hire/lease arrangement. You believe that as a result of this ‘service’ being supplied, you remained in a position of providing personal services, thus continuing an employment like relationship beyond the income tax year in question. As a result of what you believe to be a continuing employment like relationship, you understand that the correct deferred taxing point would be the following income tax year for the remaining options. This remains your position because of your verbal lease/hire arrangement with the second company that continued through until the following income tax year. | Detailed Reasoning - Application to your situation: Your company has had two independent relationships with the second company. The first is the agreement that saw them contract to provide your services as project manager and consultant. The second is the hire of vehicle and equipment. The employee share scheme provisions would not apply to the grant options to your company as it is not an individual. Such a grant would have been assessable to your company when it received it (see our web page at quick code QC 23916). The letter received from the second company makes it clear that the options were offered to you and not to your company. Half of the options were granted to you and the other half to your associate in relation to the services that you provide to the second company. You held an employee relationship with your company in respect of both of the relationships that it had with the second company. However, you only provided services the second company under the first agreement. The termination of the first agreement between your company and the second company also ended the provision of your services to the second company. As your ESS options were acquired under a tax-deferred scheme the assessable discount on these options must be included in the income year in which a deferred taxing point occurs. You exercised a total of XXX, XXX options that left a remaining XXX,XXX options that had not been exercised. The contract that gave rise to receiving the options was terminated as confirmed by the email that you received from the second company. This termination was prior to you exercising your remaining options. This termination resulted in a deferred taxing point because this point was then the earliest event in time that occurred in relation to the remaining ESS options. Therefore, you are required to include the discount amount according to your ESS statement in the relevant income tax return. | Detailed Reasoning - Conclusion: The contractual relationship between yourself and the second company, which resulted in you receiving options in the company’s employee share scheme, was terminated. Accordingly, the correct taxation point is, and remains the date in which you ceased the relationship in respect of which you acquired the employee share scheme interest. The deferred taxing point has been correctly reported in the relevant income tax year. There are no provisions under the ESS legislation that allows for an extension of time for the inclusion of an ESS discount in an income year after the income year in which the deferred taxing point has occurred. Therefore, you cannot reduce the ESS discount amounts included in your assessment, or include any of the ESS discount amounts in your assessment/s in a later income year/s.