Private ruling: Employee share scheme - taxed upfront scheme - deferred taxing scheme
Date of advice: 18 November 2015
Published: February 2016
Ruling period: Income year ending 30 June 2016.
Date scheme commenced: 1 July 2013.

Ruling: Q1: Will Subdivision 83A-C of the Income Tax Assessment Act 1997 (ITAA 1997) apply to the performance rights? | A1: No.

Relevant facts and circumstances: The arrangement that is subject of the private ruling is described below. This description is based on the documents provided with the private ruling. These documents form part of, and are to be read with this description. The relevant documents are: 1. Your application for private ruling 2. Invitation to participate in the Performance Rights Plan, which provides the following information: Eligible person You Nomination right You may nominate a related party (including a trustee of a superannuation fund) to receive your Performance Rights Number of Performance Rights You may apply for up to a specified number of Performance Rights in response to this Invitation Nature of Performance Rights Each Performance Right represents a right to be issued or transferred one share, subject to the terms and conditions of the Rules Grant date The date set out on your Certificate (Grant Date) Performance Right Fee No fee is payable upon the grant of your Performance Rights Performance Right Exercise Price No fee is payable upon the grant of your Performance Rights No vesting conditions The Performance Rights the subject of this Invitation will not be subject to Vesting conditions. As: • Your Performance Rights have no Vesting Conditions; and • Your Certificate will constitute a Vesting Notice also for the purposes of the Rules, Your Performance Rights will be vested from the Grant Date. Exercise Condition The Performance Rights the subject of this Invitation will be subject to one exercise condition, being that they may only be exercised on the Share Allotment Day. The Share Allotment Day is the day that the shares in the Company are to be issued to applicants under an initial public offering of shares in conjunction with the Company becoming admitted to the Official List of the ASX. Automatic exercise of Performance Rights on Share Allotment Day As your Performance Rights: • Have no Performance Right Exercise price; and • Have no vesting conditions, they will be deemed automatically exercised as at 12.01 am on the day on which is the Share Allotment Day. Manual exercise, in accordance with Clause 7.3 of the Rules, will not apply to your Performance Rights and they may only be automatically exercised on the Share Allotment Day. Expiry date of Performance Rights The third anniversary of the Grant Date. 3. Performance Rights Plan - Irrevocable Power of Attorney 4. Performance Rights Plan - Performance Rights Certificate, which outlines the following: This is to certify that you (the Participant) are the holder of a specified number of Performance Rights under the Company's Performance Rights Plan, as adopted by the Company(Plan). 5. Performance Rights Plan - Application Form, which outlines the following: A: Personal details You B: Application I, the individual named in Part A of this application form, hereby: a) apply to be granted a specified number of Performance Rights; and b) nominate your Family Trust to receive the resulting shares in relation to the Performance Rights the subject of my Invitation. 6. Voluntary Escrow Deed Poll, which outlines the following: 2 Escrow conditions 2.1 Holder restrictions - First Escrow Period During the First Escrow Period Schedule Item 1 Holder's name Your Family Company as trustee for the Family Trust Item 2 First Escrow period The period of 12 months commencing on the date of issue of the shares Item 3 Second Escrow period From the end of the First Escrow period until the first business day after the release of the Company's FY20YY results Item 4 Particulars of First Escrow Period Securities A specified number of ordinary shares in the capital of the Company Item 5 Particulars of Second Escrow Period Securities A specified number of ordinary shares in the capital of the Company 7. Performance Rights Plan, which outlines the following: 3.8 Right to nominate (a) Unless otherwise expressly permitted in the Invitation, an Eligible Person may only submit an Application in the Eligible Person's name and not on behalf of any other person. Of an Eligible Person is permitted in the Invitation, the Eligible Person may nominate another person to be granted the Performance Rights the subject of their Invitation and/or the Resulting Shares in relation to such Performance Rights. (b) If Performance Rights and/or Resulting Shares (as the case may be) are granted to a person nominated by an Eligible Person, then the Eligible Person and their nominees must execute any documents required by the Company in order to receive the grant, and to the extent necessary to give effect to the intent of these Rules the Eligible Person will continue to be treated as the Participant. 9. Forfeiture of Performance Rights 9.1 Good leaver 9.2 Bad Leaver 9.3 Failure to satisfy Vesting Conditions 9.4 Fraudulent or dishonest actions 9.5 Insolvency 9.6 Other forfeiture events 9.7 Discretion 9.8 Voluntary forfeiture 9.9 Application of Part 2D.2 Division 2 of the Corporations Act You have a family trust (The Family Trust). You and your spouse are the Directors of a company (the Family Company), which is the Trustee of the Family Trust. Around two months prior to the issuing of the performance rights, you accepted the position with the Company. Discussions were held by the Company around the month you commenced employment, or the following month with a potential purchaser about a potential trade sale of the Company as an alternative to initial public offering (IPO). Discussions were also held with other potential purchasers about trade sales as an alternative to IPO. Your draft employment contract with the Company was finalised in the month following your commencing employment with the Company. The Escrow conditions on the Company's performance rights were finalised (the Effective Date) in the month following you commencing your employment with the Company. At the Effective Date, the Company was planning to list on the Australian Stock Exchange (ASX) under an IPO. However, the Company needed to undertake the following actions before it could decide to proceed with the IPO: • Management roadshows needed to occur to market the IPO to institutional investors • The Company needed to take bids from the institutional investors following the roadshows, to generate interest in the Company's shares at a level that was sufficient to cover the 'book' of shares being offered for sale before the Company proceeded with the IPO • An underwriting agreement needed to be signed to underwrite the minimum price for the IPO, which would not be signed until sufficient bids had been generated • The Merger Implementation Agreement and Put and Call Option Deeds, which outlined the terms for the merger of the three founding companies to form the Company, needed to be signed • The Company's Prospectus needed to be approved by the Australian Securities and Investments Commission (ASIC) • The proposed IPO needed to be approved by the Australian Stock Exchange (ASX) • The Company's Board of Directors needed to make a resolution to proceed with the IPO; and • The Due Diligence Committee needed to make the decision to proceed with the IPO. The Company's prospectus was issued by the Company to institutional investors following the trade discussions, which included the final terms of your employment contract, the terms of the performance rights grant and the Escrow arrangements. Commencement of the Company's management roadshow to institutional investors occurred a number of days later. Institutional investor bids were received by the Company within days of the management roadshow. An underwriting agreement was signed by the Joint Lead Managers (JLM) on the same day as the institutional investor bids had been received. You signed your employment contract with the Company on the same day as the institutional investor bids had been received. A number of days later, the Company issued you: • an invitation to participate in the Company Performance Rights Plan under which you could apply for up to a specific number of Performance Rights • an application form; and • irrevocable power of attorney. A certificate dated the same date as the date the invitation was made to you, outlined that you were the certified holder of the specified number of performance rights under the Company's Performance Rights Plan. The following day, you signed the following: • the acceptance letter in which you applied to be granted the specified number of performance rights and nominated the Family Company, acting as the Trustee of the Family Trust, to receive the resulting shares in relation to the performance rights; and • the irrevocable power of attorney. On the same day, you as the director of the Family Company signed the Escow Deed Poll. The scheme under which the performance rights were issued restricted the disposal of the shares until the specified escrow period had elapsed, which was effected by the deed poll and the irrevocable power of attorney entered into at the time the performance rights were documented. Under the Deed poll: • The first tranche, for a specified percentage of the shares received upon exercise of the performance rights could not be disposed of until the first anniversary of the date the shares were issued; and • The second tranche, for a specified percentage of the shares, could not be disposed of until the first business day after the release of the Company's results for the 20XX-YY financial year. The Put and Call option deeds and the merger implementation agreement were signed on the same date you signed the acceptance letter. A number of days later, the Prospectus was lodged with ASIC for review. Around ten days after you had signed the acceptance letter, ASIC notified the Company that the review period had been extended for a number of weeks, due to the Prospective appearing to be defective. A couple of days later, a replacement Prospectus was lodged with ASIC. About six days later, the Company was admitted to the ASX Official List subject to compliance with a number of condition precedents. At the Company's due diligence committee meeting held a couple of days after the Company had been admitted to the ASX Official List, a decision was made to proceed with the IPO. The following day, the ASX confirmed the admission of the Company to the ASX Official List. On the same day, put and call options on the three merger companies were exercised and the merger was completed. The IPO became unconditional about three weeks after you had signed the acceptance letter. The first tranche of performance rights became unrestricted on the same day as the IPO became unconditional. About three days later, the Company was listed on the ASX and the IPO was completed. Your employment with the Company ceased over 12 months after the IPO was completed, however you continued to act as a director for a subsidiary of the Company in an unpaid capacity. The second tranche of performance rights became unrestricted around 24 months after the IPO was completed. You have made the following statements in the private ruling to support that Subdivision 83A-C of the ITAA 1997 should apply to your performance rights: • In your situation, the performance rights were subjected to one condition, being that the Company must complete an IPO by the third anniversary of the grant of the rights. The performance rights would expire and you would lose the performance rights if this condition was not met within the specified timeframe • At the time you received the rights, it was not certain that the Company would complete an IPO and there was a real risk of losing the performance rights • The IPO only became unconditional when the ASX approved the listing • At the time of grant, the ASIC approval, which was a condition of proceeding with the listing, had not been granted and therefore there was a real risk that the IPO would not proceed • There have been recent instances where IPO's have not proceeded due to ASIC approval being withheld, such as in the case of the Bitcoin IPO where ASIC had initially extended the approval period for the prospectus on a specific date before issuing an interim stop order a week later for undisclosed reasons. Bitcoin has not listed at this point. • An underwriting agreement had been signed by the JLMs, however, this agreement did not guarantee that the IPO would proceed as the agreement had a number of clauses which would have allowed the JLM to terminate the underwriting agreement at any time between the date of signing and the proposed date of the IPO. • The underwriting agreement provided that the JLMs at any time may immediately terminate its obligations under the underwriting agreement on the occurrence of any of the following termination events: a) ASIC does not approve the prospectus. This event could have occurred when ASIC withheld the approval of the prospectus and extended the review period due to the prospectus being defective b) The ASX withdraws qualifies or withholds its approval. This event could have occurred up until the IPO was completed. There have been instances where the ASX has withheld its approval and caused IPO's to fail, such as the Phytotech IPO which did not proceed in December 2014 due to the ASX withholding approval c) Financial forecasts become incapable of being met. As outlined below, you have identified an event that that caused the financial forecasts to be reforecast due to the event having a material negative impact on the financial forecasts; and d) There is a specified fall in the S&P ASX 200 index. This event is contingent on the performance on the market which is an event outside of the control of the Company. Given that the stock market may be volatile, this represented a genuine risk. • At the time of grant, there was a real risk that the underwriting agreement could be terminated and without the underwriting agreement in place there is a significant risk that an IPO would not proceed as there was no underwritten price for the shareholder • Discussion had been held throughout the month you commenced your employment with the Company, and during the following month, with potential purchasers about a potential trade sale of the Company instead of pursuing an IPO • The trade sale discussions supports that the Company had alternatives other than proceeding with the IPO and therefore indicates that there was a real risk of the IPO not proceeding • There have been several recent instances where planned IPO's have not proceeded and a sale to a trade buyer had occurred instead, such as in the case of Sterling Education in March 2014, Hoyts in December 2014, OzSale in May 2014 and OAMPS Insurance in April 2014 • Market volatility represents a real risk that the IPO will not proceed until the final decision to list is made by a company, which occurred for the Company at the final due diligence committee meeting. There have been a number of recent instances where companies decide not to proceed with IPO's due to volatility in the market. Media reports have cited "market volatility" as the reason for why recent IPO's for the IVE Group in June 2015 Redcape Hotel Group in July 2015, Quattro Income REIT in October 2014 and Centuria Capital in August 2015 did not proceed • A key in determining whether sufficient demand is generated from the IPO is whether the financial forecast included in the Prospectus is accurate. On the same day you signed the acceptance letter, a Government Department released new course prices which had price reductions across a number of courses the Company offered, which therefore had a negative impact on the financial forecasts. A major reforecasting exercise had to occur following this and the underwriters were closely involved in understanding the impact to the forecasts of the price reductions. A lack of confidence in the financial forecast has resulted in a number of IPO's not proceeding, including Carter Holt Harvey in June 2015, Shale Energy in January 2015 and Sterling Education in March 2014 • As of the Effective Date, the management roadshow had not occurred and institutional bids had not been taken so there was a risk that the IPO would not proceed. Sufficient interest needs to be generated from institutional investors before the underwriters are generally willing to sign the underwriting agreement which underwrites a price for the IPO. A lack of institutional demand has been a factor in a number of IPO's not proceeding, such as India Fund in June 2015, Metro Property Development in June 2015, Greenstone in June 2015, Hirepool in June 2014, STAG Beef in March 2014, Australian Gaming & Entertainment in May 2014, Mantra in March 2014, BIS Industries in November 2013 and Pacific Retail in August 2013 • There have been a number of recent cases where companies planning IPO's have decided not to proceed shortly before the anticipated IPO date which included the following: • Sterling Education, which planned to list on the ASX on 2 April 2014, however on 14 March the company decided not to proceed with the IPO as they did not generate sufficient interest from institutional investors and the company sold to a trade buyer on 24 March • IVE Group, which according to media reports had cancelled its IPO on 11 June 2015, due to current short term volatility in the equity markets. IVE Group had planned to list and begin trading on 2 July 2015 • BIS Industries, where private equity firm KKR & Co withdrew a one billion dollar plus IPO for BIS Industries in late 2013. Media reports cited that unfavourable investor sentiment towards the resources and mining sectors in Australia as the reason for the withdrawal; and • Gemstone, where in June 2015 Gemstone had decided not to proceed with its IPO, with media reports citing that the withdrawal was due to disagreements regarding the company's valuation • You were not a member of the Board of Directors of the Company, or a member of the due diligence committee, and therefore were not able to participate in the decision whether to proceed with the IPO • It is submitted that at the time the performance rights were granted to you that there was a real risk that the IPO would not proceed. Therefore, there was a real risk that you would lose the right to acquire shares in the Company • At both the Effective Date and the date the documentation of the performance rights occurred, there were a number of events which needed to occur before the IPO could proceed which included the prospectus being approved by ASIC, the ASX approving the listing of the Company and the Company making a commercial decision as to whether or not to proceed with the IPO. In this case, the final decision to proceed was only made at the last due diligence committee meeting. As noted, there were a significant number of companies in recent years which have decided not to proceed with an IPO close to the proposed listing date • At the time you received the performance rights there was a real risk that the Company would not proceed with an IPO. It follows that where the listing did not occur that there would also be a real risk that no IPO would occur within the three year life of the performance rights • You were the owner of the performance rights, however, Schedule 1 of the invitation letter outlines that the nature of the performance rights is that they are rights for your Family Company as trustee of the Family Trust to receive the shares rather than rights for you to receive shares in the Company • You were the owner of the performance rights, while beneficial interest in the rights was with the Family Trust since the Family Trust is the entity which is entitled to receive the resulting shares from the exercise of the performance of the rights. This beneficial interest has been granted to the Family Trust directly from the Company. However, the Family Trust is your associate, and you are assessable on the ESS discount in accordance with subsection 83A-305(a) of the ITAA 1997 • Upon exercise of the performance rights, the resulting shares were directly provided to the Family Trust by the Company. As noted, the performance rights which you held were rights for the Family Trust to receive shares in the Company. You never held the shares in the Company and you never transferred the performance rights to the Family Trust. This is in accordance with the application form through which the performance rights were acquired • You had legal ownership of the performance rights at grant, with the Family Trust having beneficial interest in the performance rights since the Family Trust was always the entity entitled to receive the resulting shares upon exercise of the performance rights. In accordance with section 83A-10 of the ITAA 1997, the Trust always had beneficial interest in the performance rights even though the performance rights were issued to you • The Family Trust is your associate and the discount on the interests is taxable to you even though the beneficial interest in the rights was held by the Family Trust • There was no transfer of performance rights or shares from you to the Family Trust, rather when the performance rights were exercised the resulting shares were provided directly to the Family Trust. Under the terms of the plan, neither you nor the Family Trust were able to deal with the shares in any way since the shares were subject to escrow provisions. Neither you nor the Family Trust were able to deal with, or otherwise realise the value of the shares until the escrow provisions lifted • You had not entered into the escrow in your personal capacity, but as the director of the Family Company in its role as Trustee of the Family Trust • The escrow had been entered into because it was a condition of the performance rights plan • The total number of shares under the escrow arrangement at IPO was over 60 million out of a total of around 200 million shares, with around 2 million of the shares being subject to the terms of the performance rights plan • In accordance with the performance rights plan, the Family Trust did not have any opportunity to dispose of the performance rights or shares until the point at which the escrow provisions lifted • The rights in which the Family Trust had a beneficial interest were subject to a real risk of forfeiture. Due to the escrow provisions, there was a further disposal restriction preventing the Family Trust from realising any monetary benefit from the shares until the escrow conditions expired • According the explanatory memorandum (EM) to the Tax Laws Amendment (2009 Budget Measures No.2) Bill 2009, deferral of taxation is considered appropriate treatment in situations where there is a real risk that the benefits of shares or rights may never be realised because the employee share scheme interest may be forfeited • While the timeframe between the grant of the performance rights and the date the Company proceeded with the IPO was short, the volatile and uncertain nature of IPOs meant that there was a real risk that the IPO would not proceed • Since the performance rights were at risk, and the escrow requirements prevented the disposal of the shares until escrow lifted, it is entirely within the intent of Division 83A of the ITAA 1997 that you are taxable at the deferred taxing point, being when the escrow lifts; and • You therefore submit that Subdivision 83A-C of the ITAA 1997 applies to your performance rights. You have made the following statements to support that the deferred taxing point for the first tranche of the performance rights under Subdivision 83A-C of the ITAA 1997 should be the date the escrow on the shares lifted: • the shares you received upon the exercise of your performance rights would be subject to escrow in accordance with the conditions included in the Prospectus issued to potential institutional investors • You entered into the deed poll which stipulated that you could not dispose of the shares received upon exercise of the rights until the first anniversary of receiving the rights for the first tranche of rights, and the day after the results for the Company's 20YY financial year were released for the second tranche of shares • Clause 4 of the deed poll outlines that if the Company considers that the deed poll has been breached, or may be breached, the Company may take the necessary steps to prevent the breach or to enforce the deed. To enforce the deed, clause 4(b)(ii) the Company may refuse to acknowledge, deal with, accept or register any sale, assignment transfer or conversion of the shares. These terms are reiterated in the Company's prospectus in section 9.6, demonstrating the Company's intention to enforce the deed poll in the event of a breach • You signed an irrevocable power of attorney which allows the Company to prevent the transfer, disposal or encumbrance of the performance rights and shares; and • There was a genuine disposal restriction under the scheme at the time you received the performance rights. You have made the following statements to support that the deferred taxing point for the second tranche of performance rights under Subdivision 83A-C of the ITAA 1997, that is, it should be the date the escrow on the shares lifted following the release of the Company's 20YY financial results: • You submit, that for the reasons outlined above that there was a genuine disposal restriction at the time the performance rights were acquired • Your role in the Company ended around 12 months after the IPO was completed. However, you have continued to be employed by one of the subsidiaries of the Company after your role had ended with the Company, in an unpaid capacity • As you continued to be employed in a role with a subsidiary of the Company, under section 83A-330 of the ITAA 1997 you are not treated as having ceased your employment as your employment with the Company's group continues; and • The deferred taxing point for the second tranche of shares occurred when the escrow period for those shares lifted following the date the Company's results for the 20YY financial year are released.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 83A | Income Tax Assessment Act 1997 Subdivision 83A-B | Income Tax Assessment Act 1997 Subsection 83A-25(1) | Income Tax Assessment Act 1997 Subdivision 83A-C | Income Tax Assessment Act 1997 Section 83A-105 | Income Tax Assessment Act 1997 Section 83A-305 | Income Tax Assessment Act 1997 Section 104-10

Reasons for decision: Summary: Subdivision 83A-C of the ITAA 1997 will not apply to allow a taxpayer to defer the tax on an employee share scheme discount amount. Rather, Subdivision 83A-B of the ITAA 1997 applies. | Detailed Reasoning - Employee Share Schemes: All references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise noted. Division 83A applies to shares, rights and stapled securities acquired under an employee share scheme (ESS) on or after 1 July 2009. An ESS is defined in subsection 83A-10(2) as a scheme under which ESS interests in a company are provided to employees, or associates of employees, of the company, or a subsidiary of the company, in relation to the employee's employment. An ESS interest in a company is defined in subsection 83A-10(1) of the ITAA 1997 to mean a beneficial interest in the share of the company or a right to acquire a beneficial interest in a share of the company. Subdivision 83A-B or Subdivision 83A-C of the Income Tax Assessment Act 1997 (ITAA 1997) will apply to the options granted to you by your employer if: • The options are ESS interests • The options are granted under an employee share scheme, and • The options are granted at a discount. Subsection 83A-10(1) of the ITAA 1997 defines an ESS interest in a company as a beneficial interest in: • A share in a company, or • A right to acquire a beneficial interest in a share in a company. Under Subdivision 83A-B of the ITAA 1997, discount received by a taxpayer on an ESS interest they acquire under an employee share scheme is included in their assessable income in the income year in which they acquire the ESS interest. However, Subdivision 83A-B will not apply if Subdivision 83A-C applies. | Detailed Reasoning - Subdivision 83A-C: Subdivision 83A-C allows for the deferral of tax on the amount assessable in respect of an ESS interest if certain conditions are satisfied. The discount is not included in the income year in which the ESS interests are granted, but is included in the taxpayer's assessable income at a later time, at the deferred taxing point. Subdivision 83A-C will apply to the rights if the following conditions in section 83A-105 are satisfied: 1. Subdivision 83A-B would apart from this section apply to the interest. 2. When the employee acquires the interest they are employed by the company. 3. When the employee acquires the interest all the interests available for acquisition under the employee share scheme relate to ordinary shares. 4. When the employee acquires the interest the predominant business of the company is not the acquisition, sale or holding of shares, securities or other investments. 5. Immediately after the employee acquires the interest they do not hold a beneficial interest in more than 5% of the shares in the company and are 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. 6. When the employee acquires the interest there is a real risk that under the conditions of the scheme they will forfeit or lose the interest (other than by disposing of it, exercising the right or letting the right lapse) or forfeit or lose the beneficial interest in the share (other than by disposing of it). | Detailed Reasoning - Real risk of forfeiture: In relation to the sixth condition as outlined above, Subdivision 83A-C applies to a right if, under the conditions of the ESS when the right is granted, there is a real risk that a Participant will forfeit or lose the right (other than by disposing of it, exercising the right or letting it lapse). Whether or not a real risk of forfeiture (RRF) is present will depend on the facts and circumstances of each scheme and the individual circumstances of the employee. The meaning of 'real' is something more than a mere possibility. An ESS interest will not be at real risk of forfeiture if a reasonable person would disregard the risk as highly unlikely to occur or as nothing more than a rare eventuality or possibility. RRF in a scheme may include conditions where retention of the ESS interests is subject to: • a minimum term of employment, or • performance hurdles There is no RRF where a scheme simply includes a condition which: • restricts an employee from disposing of an ESS interest for a specified time • allows an employee to request that the ESS interest be forfeited, or • provides for an employee to forfeit an ESS interest if they are dismissed for fraud or gross misconduct. Explanatory Memorandum to the Tax Laws Amendment (2009 Budget Measures No.2) Bill 2009 which inserted Division 83A, explains the real risk of forfeiture test at paragraph 1.156 as follows: The 'real risk of forfeiture test' does not require employers to provide schemes in which their employee share scheme benefits are at a significant or substantial risk of being lost. However, real is regarded as something more than a mere possibility. Something is not a real risk if a reasonable person would disregard the risk as highly unlikely to occur or as nothing more than a rare eventuality or possibility. It is further explained at paragraph 1.158 of the Explanatory Memorandum that the 'real risk of forfeiture' test is intended to provide for deferral of tax when there is a real alignment of interests between the employee and employer, through the employee's benefits being at risk. ATO Interpretative Decision ATO ID 2010/61 Income tax: Employee share scheme: real risk of forfeiture-minimum term of employment and good leaver provisions (ATO ID 2010/61) provides the Commissioner's view of when the conditions of a scheme determine that the rights will be forfeited. When an employee acquires rights under an employee share scheme, the Commissioner considers that there is a RRF if, under the conditions of the scheme, the employee will forfeit or lose the rights if they cease employment before the vesting date of the rights where that date is 12 months or more from the date the rights were granted. He elaborates on the real risk of forfeiture by stating: In considering whether a condition in a scheme imposes a real risk of forfeiture, regard should be had to whether a reasonable person would consider that there is a genuine connection between the forfeiture condition and aligning the interests of the employee and employer. If the risk of forfeiture is over a very short period of time to gain access to a relatively long period of deferral the risk will not be considered real. The counterpoint to RRF is actual forfeiture which activates the reversal mechanism contained in section 83A-310. So there will be situations where the ESS interests might be forfeited even though a reasonable person would have discount the RRF. In some of these situations, the reversal mechanism will apply to authorise the removal of an ESS discount that has previously been declared as assessable income. Application to your situation You participated in the Company's Performance Rights Plan and around two months after you commenced employment with the Company you were the certified holder of a specified number of performance rights. You have made statements in the private ruling to support that your performance rights should be assessed under Subdivision 83A-C. The Commissioner accepts that for the purposes of Subdivision 83A-C, that in relation to the performance rights you were granted under the Plan, the first five conditions have been satisfied. However, we need to consider whether condition six as outlined above has been met, that is that there was a RRF. We have taken the following into consideration when making our decision on whether or it is viewed that there was a RRF in relation to your Performance Rights: • The performance rights could only be exercised if the Company completed the IPO within three years of the date of grant • The IPO becoming unconditional was subject to ASX listing and ASIC approval • Discussions had been held by the Company with potential trade buyers in the month you commenced your employment with the Company, and during the following month • An Underwriting Agreement was signed around a week after the prospectus had been issued by the Company. However, the agreement could be terminated if any of the termination events occurred. Without the Underwriting Agreement there was a risk that an IPO would not proceed • No institutional bids had been received as of the Effective Date, being the date your employment contract with the Company was finalised, around one month after you commenced your employment • A Government Department had released new course prices on the date you signed the acceptance letter, which resulted in a major reforecasting having to be undertaken so that the impact on the Company's financial forecast could be determined • You were not a member of the Company's Board of Directors, or a member of the Due Diligence Committee • Some IPOs have not proceeded due to companies deciding to sell to trade buyers due to insufficient demand, failure to attract investors, volatile market conditions, inability to finalise forecasts in the IPOs • All of the nominated IPO failures occurred after this listing and could not have been factored into any conclusion about RRF • The Plan contains forfeiture conditions relating to the following: • Good leaver • Bad Leaver • Failure to satisfy Vesting Conditions • Fraudulent or dishonest actions • Insolvency • Other forfeiture events • Discretion • Voluntary forfeiture • The Escrow contained conditions that meant that the resulting shares could not be disposed of for a specified period, being the first tranche of shares could not be sold until the first anniversary of the date the shares were issued and the second tranche of shares could not be disposed of, which was after the Company's results for the 20YY financial year were released. Based on the information and documentation provided with the private ruling, it is the Commissioner's view that there was not a RRF in relation to your Performance Rights based on the following reasons: You have raised that numerous IPOs do not reach completion for various reasons including the Bitcoin IPO prospectus which has been stopped. Media releases identify that the Bitcoin IPO prospectus as being the world's first IPO in that industry, and will therefore be setting a precedent in relation to an IPO for that industry. Stops had been put on the prospectuses lodged by Bitcoin with ASIC as ASIC had wanted to ensure that the Bitcoin investors were fully informed. It cannot be viewed that the Company's IPO is setting a precedent for the industry it is in. While some IPOs have not been completed, we are only looking at the facts relating to your situation and based on the actions of the Company once the prospectus was issued by the Company to institutional investors, the Company's actions only support that they were endeavouring to continue undertaking actions to ensure that the IPO became unconditional in an expedient timeframe. It has been stated that the Government Department had released new course prices with reduced prices for some of the courses offered by the Company. As a result of the new course prices, the underwriters had been involved to enable the Company to understand the impact of the reduced course prices to the forecasts of the price reductions. Even with the reduced course prices and the revised forecasts, the Company had continued actions to ensure the IPO became unconditional. Besides which, this release occurred on the same day that you accepted the offer and so it is considered to be a fact that it was already known. Further, it is likely that the timing of the IPO was chosen so that this release could form part of the marketing of the IPO given its likely relevance. In your situation, while trade discussions had occurred between the Company and a number of potential buyers, the actions taken by the Company in relation to completing the IPO supports that they were committed to ensuring that the IPO became unconditional. Those actions include: • the short period of time that passed from the date the Company's Prospectus was issued by the Company until the IPO became unconditional • upon being notified by ASIC that the Prospectus appeared to be defective, the Company had submitted a replacement Prospectus two days later; and • the total period of time for the IPO to become unconditional was just over 30 days. As outlined above, ATO ID 2010/61 provides that if the risk of forfeiture was over a very short period of time to gain access to a relatively long period of deferral, the risk would not be considered to be real. This considers the real and not merely any theoretical risk on the basis of the information as at the date the ESS interests were issued. In your case, if the Performance Rights had been at risk, it was for a very short period of time, from when they were granted, until the IPO became unconditional and the rights automatically exercised, a period of less than a month. Any delay in completing the IPO would most likely have been very short. An ESS plan rule that restricts the employee from disposing of the ESS right or resulting share for a specified period of time is not viewed as sufficient for it to be viewed that there is a RRF. Therefore, while the resulting shares could not be disposed of for specified periods, it cannot be viewed that a RRF existed in relation to your performance rights simply because the Escrow contained conditions that outlined that you could not dispose of the resulting shares for a specified period of time. Accordingly, as the Commissioner views that there is not a RRF of the performance rights, subsection 83A-105(3) does not apply to the performance rights and neither does Subdivision 83A-C. Consequently, Subdivision 83A-B of the ITAA 1997 will apply to your performance rights and the discount that you received due to the granting of them will be included in your assessable income under by subsection 83A-25(1) in the year that they are granted to you. | Detailed Reasoning - Further issues for you to consider: The following information is provided as written guidance. A taxpayer who relies on guidance will remain liable for any tax shortfall if the guidance is incorrect or misleading and they make a mistake as a result (unless a time limit imposed by the law precludes the liability). However, they will be protected against the shortfall penalty and interest on the tax shortfall provided they relied on that guidance reasonably and in good faith. | Detailed Reasoning - Acquisition by nominee: If an associate of a participant, other than an employee share trust, acquires a right that is an ESS interest in relation to the participant's employment, section 83A-305 operates to: • treat the right as having been acquired by the participant; • treat any circumstance, right or obligation existing or not existing in relation to the right in relation to the associate as existing or not existing in relation to the participant; and • treat anything done or not done by or in relation to the associate as having been done or not done by or in relation to the participant. Associate is defined in subsection 995-1(1) as having the meaning given by section 318 of the Income Tax Assessment Act 1936 (ITAA 1936). Where a participant elects to have their rights granted to a nominee and that nominee is an associate as defined in subsection 995-1(1) of the ITAA 1936, section 83A-305 would operate to treat the right as having been acquired by the participant. Where the nominee disposes of the share acquired upon vesting of the right, the participant is taken for the purposes of Division 83A to have disposed of the share. All the terms and conditions which apply to the nominee in relation to the rights and shares are taken to apply to the participant. This would include such things as the trading restrictions placed upon the shares and Performance Criteria which apply to the rights. Application to your situation You were personally certified as the owner of the Performance Rights on the date that you were issued an invitation to participate in the Company's Performance Rights Plan. You had nominated the Family Trust, to receive the resulting shares. You signed the escrow agreement on behalf of the Family Trust. The performance rights were exercised when the IPO was completed and the resulting shares were transferred from the Company's Trust to the Family Trust. You have claimed that while you were the legal owner of the performance rights, the beneficial interest in the rights lay with the Family Trust as it was entitled to receive the resulting shares from the exercising of the performance rights. Neither the rights nor the resulting shares were passed by you to the Family Trust. Upon the exercising of the rights, the resulting shares were directly provided to the Family Trust by the Company. You never held the resulting shares and never transferred the rights to the Family Trust. Generally when section 83A-305 occurs, the initial grant of ESS rights or shares would be put in the associate's name. However, this has not occurred in your situation. Instead of the rights being put into the Family Trust's name, they were placed into your name. As you were the named owner of the original ESS interest, being the performance rights, the whole of Division 83A is focussed on what you did with them and with the resulting shares, including by divesting yourself of the ownership of them. As you were the owner of the performance rights, you were the only one who could legally exercise them. The only way another entity could exercise the performance rights was if you transferred your ownership of them to the other entity. The Commissioner has accepted your submission that there was no transfer of the ownership of the performance rights. You acted in accordance with the ESS by nominating an alternate recipient for the shares acquired on exercise of the performance rights. It is viewed that legally, when you did this, you nominated to dispose of your ownership interest in the resulting shares to the Family Trust. Based on the information you have provided, it is viewed that your situation is similar situations that are described as either a cashless exercise, or same day sale, in which the owner of ESS rights advises the selling agent that they are to be exercised and the resulting shares sold on the same day, with the owner of the rights receiving the net proceeds. In fact, the argument you have presented could technically lead to a double taxation if Division 83A is separately applied to both: • the grant of the performance rights to you, and • the grant of the shares to your associate, the Family Trust. The discount arising in relation to your Performance Rights should be assessed under the ESS provisions upon their grant. However, once an ESS interests have been taxed under the ESS provisions, subsequent events are then taxed under the capital gains tax (CGT) provisions. It is the Commissioner's view that CGT event A1 occurred when you transferred your ownership interest in the resulting shares to the Family Trust and you will need to address any CGT implications arising from their disposal accordingly.