Private ruling: Employee Share Scheme - Section 139E late election
Date of advice: 7 July 2016
Published: August 2016
Ruling period: Income year ended 30 June 20YY
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will the Commissioner allow the taxpayer to make a late election under subsection 139E(1) of the ITAA 1936 to assess any discount in respect of indeterminate rights acquired in the 20YY income year under subsection 139B(2) of the ITAA 1936? | A1: Yes | Q2: Will the Commissioner allow the taxpayer to make a late election under subsection 139E(3) of the ITAA 1936 to assess any discount in respect of other Post employment Awards issued prior to the 20YY income year, in the 20YY income year under subsection 139B(2A) of the ITAA 1936? | A2: No

Relevant facts and circumstances: 1. The taxpayer was employed overseas from the 20WW income year until into the 20YY income year, and then with an Australian subsidiary in the 20YY income year until into the 20ZZ income year. 2. The taxpayer commenced Australian residency for tax purposes in the 20YY income year. 3. The taxpayer acquired indeterminate rights in the 20YY income year. 4. The taxpayer acquired other awards prior to the 20YY income year. 5. All the awards acquired by the taxpayer were issued at a discount to the market value on the date of grant. 6. This private ruling does not apply to any discount in respect of awards which vested before the taxpayer became an Australian resident as it is excluded from the operation of Division 83-A of the ITAA 1936. 7. Immediately after the acquisition of the awards : • The taxpayer did not hold a legal or beneficial interest in more than 5% of the shares in the company. • The taxpayer was not in a position to cast, or control the casting of, more than 5% of the maximum number of votes that might be cast at a general meeting of the company. 8. The taxpayer did not make an election under section 139E of the ITAA 1936 in the 20YY income year to tax any discounts in respect of awards granted. 9. The taxpayer wishes to make a late section 139E election in relation to the 20YY income year in respect of the awards to which Division 83-A of the ITAA 1936 applies.

Relevant legislative provisions: Income Tax Assessment Act 1936 , Division 13A | Income Tax Assessment Act 1936 , Section 139B | Income Tax Assessment Act 1936 , Section 139CB | Income Tax Assessment Act 1936 , Subsection 139CD (1) | Income Tax Assessment Act 1936 , Subsection 139CDA | Income Tax Assessment Act 1936, Section 139E | Income Tax Assessment Act 1936, Subsection 139GA(2) | Income Tax (Transitional Provisions) Act 1997 , Subsection 83A-5(2) | Income Tax (Transitional Provisions) Act 1997 , Section 83A-15

Reasons for decision: Detailed Reasoning - Discount on rights is assessable income: 10. A discount given in relation to a right acquired under an employee share scheme is included in the assessable income of the taxpayer (subsection 139B(1)) of the ITAA 1936). A right is acquired under an employee share scheme if it is acquired in respect of any employment of the taxpayer (subsection 139C(1)) of the ITAA 1936). 11. An 'employee' is defined in subsection 139GA(1) to mean a person who received work and income support related withholding payments and benefits or a person who is engaged in 'foreign service'. 12. 'Foreign service', under section 139GBA of the ITAA 1936, is service in a foreign country as the holder of office or capacity of an employee. 13. For any period during which the taxpayer is a non-resident, the discount is not included in the assessable income of the taxpayer to the extent that the discount is given in respect of the taxpayer's engagement in foreign service relating to the acquisition of the right (subsection139B(1A) of the ITAA 1936). 14. Subsection 139B(2) of the ITAA 1936 specifies that the discount is to be included in the taxpayer's assessable income in the year in which the rights are acquired, unless subsection 139B(2A) or subsection 139B(3) applies. 15. Under subsection 139B(2A) of the ITAA 1936, if the right was acquired while the taxpayer was not an employee, the discount is included in the taxpayer's assessable income in the year of income in which, after the acquisition, the taxpayer first becomes an employee in respect of employment or services that affect the acquisition or holding of the right. 16. Thus, subsection 139B(2A) requires that where a taxpayer acquired a right whilst in foreign service, and then becomes an employee in Australia, the discount is included in the taxpayer's assessable income in the year that the taxpayer becomes an employee in Australia, provided that Australian employment affects the acquisition or holding of the right. 17. An individual's employment affects the acquisition or holding of the right if, for example, the right may be forfeited unless the individual undertakes further employment or services. 18. Subsection 139B(3) of the ITAA 1936 provides that, where no section 139E election is made, the discount on qualifying rights (as defined in section 139CD of the ITAA 1936) is included in the taxpayer's assessable income in the year of income in which the cessation time occurs. Application to the taxpayer 19. The taxpayer acquired all of the awards in the 20YY income year or earlier and first became an Australian resident in the 20YY income year. 20. The taxpayer's service with the Australian subsidiary affected the acquisition or holding of a proportion of the other awards (the 'Post-employment Awards'), as those Post-employment Awards would not have vested but for the taxpayer's continued services with the Australian subsidiary. 21. Similarly, the taxpayer's service with the Australian subsidiary affected the acquisition or holding of all of the indeterminate rights as those would not have vested but for the taxpayer's continued services with the Australian subsidiary. 22. Thus, in accordance with subsection 139B(2A), the discount in respect of the Post-employment Awards and indeterminate rights is assessable in the year in which the taxpayer first became an employee of the Australian subsidiary, being at a time after the taxpayer acquired these rights. The exception is where the rights are qualifying rights subject to subsection 139B(3) of the ITAA 1936. | Detailed Reasoning - Qualifying rights: 23. Former subsection 139CD(1) of the ITAA 1936 provides 'a right to acquire a share' in a company is a qualifying right if: a. the conditions set out in subsections 139CD(2), (3),(4),(6) and (7) are satisfied; and b. in the case of a right that a taxpayer has acquired while engaged in foreign service, section 139CDA (about being engaged in foreign service) applies to the right. 24. As all the conditions are met, in the taxpayer's case in respect of all the Post-employment Awards and Indeterminate rights, they are qualifying rights for the purpose of section 139CD of the ITAA 1936. | Detailed Reasoning - Section 139E election timing and effect: 25. Section 139E of the ITA 1936 provides taxpayers with the ability to make one of two different elections affecting the timing of assessability of the discount on rights, provided the taxpayer satisfies certain requirements. | Detailed Reasoning - Election where rights acquired in an income year: 26. A taxpayer can make an election under subsection 139E(1) of the ITAA 1936 that subsection 139B(2) of the ITAA 1936 applies for a year of income in relation to each qualifying right acquired in that year by the taxpayer (subsection 139E(1)). 27. An election under section 139E(1) must be made before the taxpayer lodges his or her return for the year of income in which the shares or rights were acquired, or within such further time as the Commissioner allows (subsection 139E(2)). | Detailed Reasoning - Election where rights acquired in an earlier income year: 28. A taxpayer may make an election under subsection139E(3) so that subsection 139B(2A) of the ITAA 1936 applies if: • the taxpayer becomes an employee during a year of income (the employment year) (subsection 139E(3)(a)); and • The taxpayer acquired qualifying shares or rights before the employment year, and whilst the taxpayer was not an employee (subsection 139E(3)(b)). 29. For the purpose of subsection 139E(3)(a), subsection 139GA(2) of the ITAA 1936 excludes from the meaning of 'employee' a person who is engaged in foreign service. 30. The subsection 139E(3) election applies for each of the years of income before the employment year, and cover each qualifying right acquired in any of those years by the taxpayer. The election is to be made before lodgement of the income tax return for the employment year. Application to the taxpayer | Detailed Reasoning - Post-employment Award and section 139E election: 31. The taxpayer did not make a subsection 139E(3) election in respect of any of the Post-employment Awards in the 20YY income tax return. | Detailed Reasoning - Indeterminate rights and section 139E election: 32. The taxpayer did not make a subsection 139E(1) election in respect of any of the indeterminate rights in the 20YY income tax return. 33. However, the Commissioner may, in certain circumstances, allow a section 139E election to be made at a later time than the date of lodgement of the taxpayer's income tax return for the relevant year. | Detailed Reasoning - Qualifying rights acquired before 1 July 20YY where no section 139E election made: 34. Under subsection 83A-5(2) of the Income Tax (Transitional Provisions) Act 1997 [IT(TP)A]), subdivision 83A-C of the Income Tax Assessment Act 1997 (ITAA 1997) (and the rest of Division 83A of that Act, to the extent that it relates to that Subdivision) applies in relation to an ESS interest if: • The interest was acquired before 1 July 20YY; • Before 1 July 20YY, subsection 139B(3) applied where the right is a qualifying share or right and the taxpayer has not made an election under section 139E covering the right (83A-5(2)(a)(i) of the IT(TP)A 1997); and • The cessation time, per subsection 139B(3) of the ITAA 1936, did not occur before 1 July 20YY. 35. To avoid doubt, for the purposes of subparagraph 83A-5(2)(a)(i), if a taxpayer acquires the rights while engaged in foreign service (before 1 July 20YY) and first became an employee in respect of employment or services that affect the acquisition or holding of a right before the cessation time for the interest (subsection 83A-5(2A)), this subparagraph is satisfied. Application to the taxpayer 36. With reference to the Post-employment Awards and the indeterminate rights and the requirements of subsection 83A-5(2) of the IT(TP)A: • These rights were a right to acquire shares as at the date they were granted before 1 July 20YY; • They were qualifying rights, as above; and • The cessation time was on or after 1 July 20YY. 37. Thus, the transitional provisions will apply in relation to the Post-employment Awards and the indeterminate rights under Division 83A of the IT(TP)A 1997 provided that the taxpayer has not made an election under section 139E of the ITAA 1936 in relation to the Post-employment Awards and Indeterminate rights. | Detailed Reasoning - Request for extension of time to make a 139B election: 38. If a participant did not make a section 139E election in the taxpayer's income tax return for the relevant income year, former Division 13A will continue to apply to allow the Commissioner, after receiving a request made by a participant, to allow an election at a later time under former section 139E(2A) in respect of qualifying rights. 39. As the taxpayer did not make an election in respect of the Post-employment Awards and Indeterminate rights in the income tax return for the 20YY income year, the Commissioner will consider a late section 139E election request. 40. The submissions made by the taxpayer for not making an election in respect of all the rights issued to him, and requesting the Commissioner to exercise his discretion to allow a late section 139E election, in respect of the Post-employment Awards and Indeterminate rights are: a) At the time of lodgement of the 20YY income tax return, the taxpayer was not made aware of the option to make an election under section 139E of the ITAA 1936. b) The taxpayer was advised of the ability to make an election under section 139E of the ITAA 1936 in the 20YY income year when the taxpayer changed accountants in 2013. c) The taxpayer would have made a section 139E election in the 20YY income year, if known about the option to make an election given: (i) the taxpayer's position; (ii) the taxpayer's awareness of the movements in value of the stock; and (iii) the taxpayer was in a position to pay the additional tax. d) The Commissioner allowed the making of a late election under section 139E of the ITAA 1936 for indeterminate rights in Class Ruling CR 2011/23 Income Tax: Shell Group Performance Share Plan Award (the Shell Plan). Similarly, the Commissioner should exercise his discretion to allow a late section 139E election in the taxpayer's case as the taxpayer could not know if the awards granted would ultimately be treated as if they were always rights to acquire shares for the purpose of former Division 13A, until the award was satisfied with shares. Only once the award was satisfied with shares can an election be made. e) All awards to the taxpayer, including the awards of Post-employment Awards, were indeterminate rights Essentially, in the circumstances of Class Ruling CR 2011/23, a late election request was granted in respect of indeterminate rights because: • The awards granted before 1 July 20YY did not vest and become a right to acquire shares until after 1 July 20YY; and • It was uncertain if the award would ultimately be treated as if it were always rights to acquire shares for the purposes of former Division 13A because of the performance hurdles which must be met before the awards vested. Thus, until the award was satisfied with shares, a participant could not be certain that section 83A-15 of the IT(TP)A 1997 would apply to the award. | Detailed Reasoning - Indeterminate rights -Section 83A. 340 of the ITAA 1997: 41. An indeterminate right is an interest in a right where, at the time of acquisition, it is unclear whether receipt of an share will result, it may be uncertain as to how many shares will be received as a result of exercise of that right: The benefit is in a form which leaves doubt whether it will finally comprise ESS interests, or where the number of ESS interests is uncertain. 42. Indeterminate rights are, for example: • rights to shares with a specified total value, rather than a specified number of shares; • rights to an indeterminate number of shares, the number being dependent on the share price at a time in the future; or • can be settled in either shares or cash (at the discretion of the employer). 43. Under section 83A-15 of the IT(TP)A 1997, indeterminate rights granted before 1 July 20YY are treated as always having been treated as a right to acquire shares once the Award is satisfied with a definite number of shares (or equivalent) after 1 July 20YY (section 83A-340 of the ITAA). Division 13A of the ITAA 1936 is taken to have applied as if the right had always been a right to acquire the beneficial interest in the share where a section 139E election is made. 44. Indeterminate rights may become rights to acquire shares upon the occurrence of certain events, including: • when shares are provided in satisfaction of the rights; • when the company makes a decision to satisfy the rights with shares; or • when the number of shares that will be provided in satisfaction of the rights can be determined. 45. Until the award is satisfied with shares, a taxpayer cannot be certain that the transitional provisions would apply to the award. The taxpayer can only make a section 139E election in relation to indeterminate rights once these rights have become a right to acquire shares for the purpose of former Division 13A. Application to the taxpayer - the Post-employment Awards 46. The Post employment Awards were not indeterminate rights; they could not be settled in cash or shares. 47. As the Post-employment Awards were rights to acquire shares from the time of acquisition, the taxpayer was eligible to make an election in respect of those under subsection 139E(3) of the ITAA 1936 for the 20YY income year prior to lodgement of the 20YY income tax return. 48. The 20YY income tax return was lodged without a section 139E election because the taxpayer was not made aware of the eligibility to make an election: In relation to the Post-employment Awards, the Commissioner does not consider it fair and reasonable to grant a late section 139E election request under subsection 139E(3) of the ITAA 1936 for the reason provided. Application to the taxpayer- The indeterminate rights 49. The indeterminate rights were granted to the taxpayer in the 20YY income year subject to a vesting event. 50. The indeterminate rights could be satisfied by the issue of shares or the payment of an amount of cash solely at the discretion of the company employer. 51. In the CR 2011/23, the Commissioner allowed the making of a late section 139E election, under the former subsection 139E(2A) of the ITAA 1936, in respect of indeterminate rights granted in the March 20YY income year, and which became rights to acquire shares after 1 July 20YY. The reason provided was that a participant could not make an election in the 20YY income year as they did not know if the award would ultimately be treated as if it were always rights to acquire shares for the purposes of former Division 13A. On the same basis, a participant cannot be certain that section 83A-15 of the IT(TP)A 1997 will apply to the award. 52. The earliest that the taxpayer could have made an election under subsection 139E(1) of the ITAA 1936, in respect of the indeterminate rights is after the vesting event when the exercise of the indeterminate rights, at the sole discretion of the company employer, was satisfied with shares. 53. The taxpayer has not lodged his income tax return for the year of cessation, pending the outcome of this private ruling application. 54. Given the taxpayer could not have made a section 139E election until the exercise of the indeterminate rights were satisfied with shares, and the taxpayer has awaited this ruling as to the eligibility to so now elect, the Commissioner will exercise his discretion to grant a late election under subsection 139E(1) to assess the discount in relation to the indeterminate rights in the 20YY income year under subsection 139B(2) of the ITAA 1936. 55. Subsection 83A-15(3) of the IT(TP)A 1997 allows the Commissioner to amend the relevant income tax return(s) of the taxpayer at any time to give effect to the operation of the indeterminate rights provision in the IT(TP)A.