Private ruling: ESS deferred taxation point
Published: February 2015
Ruling period: Income year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Will the transition from employee to independent contractor trigger the deferred taxation point under section 83A-120(5) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No

Relevant facts and circumstances: X is a wholly-owned subsidiary of Y. X established an Employee Incentive Plan (the plan) in 20xx to provide long term incentives for key employees of X and its subsidiaries, including Y, in order to align the interest and motivations of such key employee with the interests of X. You were one such key employee and were granted options under the plan. The options have time based vesting and a transfer condition. None of the options have vested yet. The first vesting of the options will occur in 20xx. Y, and you, are seeking to transition you from your role as employee and CTO of Y to an independent contractor arrangement. In this role as a contractor, you will act as an advisor to Y, and consult with the company for a minimum amount of hours each month. This transition is based on numerous commercial and personal factors. Under this transition arrangement, you will cease to be an employee and will become an independent contractor of the same company. At no time in this transition period will you be neither.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 83A-10 | Income Tax Assessment Act 1997 section 83A-35 | Income Tax Assessment Act 1997 section 83A-105 | Income Tax Assessment Act 1997 section 83A-120 | Income Tax Assessment Act 1997 section 83A-325 | Income Tax Assessment Act 1997 section 83A-330

Reasons for decision: Detailed Reasoning - Employee Share Schemes (ESS): All references are to the Income Tax Assessment Act 1997 (ITAA 1997). Division 83A applies to shares, rights and stapled securities acquired under an employee share scheme on or after 1 July 2009. An employee share scheme 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) as a beneficial interest in: (a) a share in the company; or (b) a right to acquire a beneficial interest in a share in the company. | 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. Subdivision 83A-C will apply to the rights if the following conditions in section 83A-105 are satisfied: (a) Subdivision 83A-B would, apart from section 83A-105, apply to the rights; and (b) subsections 83A-35(3), (4), (5) and (9) apply to the rights; and (c) there is a real risk that you will forfeit or lose the interest (other than by disposing of it, exercising the right or letting it lapse) pursuant to subsection 83A-105(3). | Detailed Reasoning - ESS deferred taxing point: Section 83A-120 provides the rules for determining when the ESS deferred taxing point occurs where you are the holder of beneficial interest in a right. This will be the earliest of the following times: • when the employment in respect of which you acquired the rights ends as per subsection 83A-120(5) • seven years after acquiring the rights as per subsection 83A-120(6) • when the right has not been exercised, there is no real risk of forfeiting the right, and the scheme no longer genuinely restricts disposal of the right as per subsection 83A-120(4) • when there is no real risk of forfeiting the right or underlying share, and the scheme no longer genuinely restricts exercise of the right or disposal of the resulting share as per subsection 83A-120(7). Section 83A-330 provides that for the purpose of Division 83A you will be 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 of your employer c) a subsidiary of your employer d) a subsidiary of a holding company of your employer. However section 83A-325 operates to expand the definition of an employee to include both common law employees and other individuals in relationships similar to that of an employee. In paragraph 1.374 of the Explanatory Memorandum (EM) to the Tax Laws Amendment (2009 Budget Measures No.2) Bill 2009 it was stated that the purpose of section 83-325 is to ensure that people such as directors or office holders who are not considered employees, but who are in an employee-like relationship are not excluded from participating in employee share scheme. Further the subsequent paragraph 1.375 explicitly confirms that Division 83A also covers taxpayers who are independent contractors. It follows that you will meet the expanded definition of an employee both before and after you transition to an independent contractor. Given that the rights will not forfeit on the transition between employee and independent contractor it is considered the acquisition of these rights relate to both your employment as an employee and as an independent contractor. It is clear that the definition of ceasing your employment under section 83A-330 makes allowance for individuals to change roles within a company or even within a group of companies without triggering a deferred taxation point. In your circumstances you will for the purpose of Division 83A remain employed by Y at all times, consequently the deferred taxation point under section 83A-120(5) will not occur on the transition between employee and independent contractor.