Private ruling: Employee share scheme - Takeover - Matching interests
Published: July 2014
Ruling period: 2013-14 income year | 2014-15 income year
Date scheme commenced: 1 July 2011

Ruling: Q1: Will the operation of section 83A-130 of the Income Tax Assessment Act 1997 (ITAA 1997) prevent a deferred taxing point arising under section 83A-120 of the ITAA 1997 in respect of the roll-over of the original performance share units (PSU) awards into Roll-over RSUs? | A1: No.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. The arrangement to which this Private Ruling relates is the proposed roll-over of the Taxpayer's ESS interests which were granted to the Taxpayer by company A following its takeover by company B. Background The Taxpayer was awarded original awards in the relevant years in relation to their employment in Australia with a wholly owned subsidiary of company A. An original award entitles the Taxpayer to acquire ordinary shares in company A, subject to vesting conditions. In 20XX, company A was acquired by company B. The Taxpayer has been offered the opportunity to roll-over an amount equal to the accrued value of the original awards into a new equity award. Further, if the Taxpayer accepts the roll-over offer they will also be granted Matching ESS interests in the company B for an equivalent amount of the accrued value of the original awards. This Private Ruling application seeks the Commissioner's opinion regarding the Roll-over element of the offer and does not address the Matching element of the offer. Summary of the original awards Details of the Taxpayer's original awards are as follows: • An original award entitled the Taxpayer to acquire ordinary shares in company A, subject to vesting conditions. The original awards did not have an exercise price. The resulting shares would have entitled the Taxpayer to vote. • The original awards are ESS interests to which Division 83A of the ITAA 1997 apply on the basis they entitled the Taxpayer to acquire an ordinary share in the holding company of the Taxpayer's employer company. • The vesting conditions were subject to ongoing employment and also performance conditions. Vesting requires ongoing employment with the Group. The performance conditions were determined by measuring company A's Total Shareholder Return relative to other companies in a Peer Group. • The final position of company A in the overall TSR ranking compared with the peer group of companies determines the final number of awards that vest. • Generally if the Taxpayer's employment with the Group terminated before the end of the vesting period any original awards would be cancelled unless the Remuneration Committee determined otherwise. • At the time the Taxpayer acquired the original awards they did not hold a beneficial interest in more than 5% of company A and 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 company A. • Accordingly the original awards were ESS interests which met the conditions for tax deferral under Subdivision 83A-C of the ITAA 1997. • In the absence of the takeover the original awards would vest three years from the date of grant. • The Taxpayer is not entitled to any dividends or other distributions (whether income or capital in nature) made in respect of the underlying company A shares prior to the original awards vesting. • The Taxpayer is entitled to receive 'dividend equivalents'. A dividend equivalent is a conditional right to receive a dividend amount which is accrued during the vesting period. At the date of vesting of the original awards, the accrued dividend equivalent amount is converted into shares in company A in the same proportion as the vested original awards. • To date the Taxpayer has not been assessed under Division 83A of the ITAA 1997 on the ESS discount provided in relation to the original awards. The original awards had not vested prior to the takeover of company A by company B and accordingly a deferred taxing point for the purposes of section 83A-120 had not arisen. Summary of the Takeover and the Roll-over of the original awards The background to the takeover and the proposed roll-over is as follows: • Recently company A was acquired by company B. • Based on the public offer made, the initial transfer of shares to company B was over 90% of the total outstanding shares. Due to the relevant regulations, it was not possible to 'buy out' the remaining shareholders immediately. The transfer of the remaining shares was just completed and accordingly should be considered to be a 100% takeover for the purpose of section 83A-130(1)(a)(i) of the ITAA 1997. • Prior to the takeover, the ordinary shares in company A were listed on a relevant Stock Exchange. • To continue to align the interests of company A and its employees, company B allowed employees to roll their existing awards into an equivalent roll-over plan under which the Taxpayer would be entitled to acquire ordinary shares in company B. • Following the takeover of company A, the Taxpayer continues to be employed by company A, which is a wholly owned subsidiary of company B following the takeover. • Under the new arrangement the Taxpayer has been offered the opportunity to either: • Cash out the original awards, and be entitled to new issues of new awards in the next three years, or • Roll-over the current value of the original awards into new Roll-over awards and, in addition to the rolled over amount, receive one for one Matching new awards • The new Roll-over awards will entitle the Taxpayer to acquire an ordinary share in the capital of company B a company with limited liability and which is registered overseas. The awards will not have an exercise price. • The Roll-over awards will be held on behalf of participating employees via a Foundation, which is a 'look through vehicle' used for administrative purposes in the home country. Employees are, therefore, entitled to the full beneficial ownership of the underlying ordinary shares. These ordinary shares are non-voting shares and employees are fully entitled to share in the profit reserves upon winding up the company and hold all other legal rights attached to share ownership. • The Foundation is considered to be an employee share trust for tax purposes in the home country. The Foundation is established for administrative purposes only and is a generally accepted and common vehicle under the home country's law. • The Foundation is the holder of the shares. At the vesting date, the number of certificates that are distributed to employees is equal to the number of Roll-over awards which were awarded and which have vested. At that time, the total number of shares underlying the certificates will be transferred to the foundation and held there on behalf of employees. • This will entitle the employees to the full beneficial ownership of the underlying shares. For Australian tax purposes, the certificates would be considered to be Bearer Depository Receipts • The new Roll-over awards will be subject to a disposal restriction expected to be approximately five years and will not be accessible other than on termination of employment during the restriction period • Due to the change of control at the time of the takeover, the performance metric testing against which the original awards would be tested could no longer be measured. Therefore, company B offered the employees the opportunity to roll-over their original awards into the new plan. This also involved employees accepting the ongoing vesting conditions. Both the original awards and the Roll-over awards had service based conditions, and • The Taxpayer is considering whether to accept the offer to roll-over the original awards and receive an equivalent value of Roll-over awards which will entitle the Taxpayer to receive ordinary shares in company B. Certain documents were provided with the private ruling request and are to be read with and form part of the description of the scheme for the purpose of this ruling.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 83A and | Income Tax Assessment Act 1997 Section 130-90.

Reasons for decision: Summary: While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision. The operation of section 83A-130 of the ITAA 1997 will not prevent a deferred taxing point arising under section 83A-120 of the ITAA 1997 in respect of the roll-over of the original PSU awards into Roll-over RSUs. | Detailed Reasoning - Detailed reasoning: Division 83A of the ITAA 1997 provides rules to tax the value of benefits received by employees under employee share schemes. Subsection 83A-10(1) of the ITAA 1997 defines an ESS interest in a company 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. Subsection 83A-10(2) of the ITAA 1997 defines an employee share scheme as a scheme under which ESS interests in a company are provided to employees, or associates of employees, (including past or prospective employees) of: (a) the company; or (b) subsidiaries of the company; in relation to the employees' employment. Subdivision 83A-B of the ITAA 1997 includes the discount in relation to an ESS interest that is acquired under an employee share scheme in a taxpayer's assessable income in the year that the taxpayer acquires it. Subdivision 83A-C of the ITAA 1997 moves the determination of the amount of the discount and its assessability to the deferred taxing point if certain conditions are met. The original awards meet these deferral conditions. The deferred taxing point for ESS interests that are rights to acquire shares is defined by subsection 83A-120(2) of the ITAA 1997 to be the earliest of the times mentioned in subsections (4) to (7). Subsection 83A-120(4) of the ITAA 1997 states that the first possible taxing point is: (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. The actual disposal of ESS interests is an example of the first possible taxing point mentioned above. Section 83A-130 of the ITAA 1997 provides an exception to the abovementioned 'disposal' outcome where the disposal occurs as part of a 100% takeover. Subsection 83A-130(2) of the ITAA 1997 states: For the purposes of this Division, treat any ESS interests (the new interests ) in a company (the new company ) that you acquire in connection with the takeover or restructure as a continuation of the old interests, to the extent that: (a) as a result of the arrangement or change, you stop holding the old interests; and (b) the new interests can reasonably be regarded as matching any of the old interests. The Explanatory Memorandum to the Tax Laws Amendment (2009 Budget Measures No. 2) Bill 2009 states: | Detailed Reasoning - Takeovers and restructures: 1.244 The employee share scheme rules ensure that employees are not adversely affected by takeovers and restructures, by allowing taxpayers who have deferred tax under an employee share scheme to roll-over an ESS deferred taxing point that would otherwise occur due to a corporate restructure. 1.245 Since there are situations where employees may defer their income tax liability arising from a discount on shares or rights, a corporate restructure may give rise to a deferred taxing point by triggering a disposal of the shares or rights or by breaking the employment relationship between an employee and the company that originally granted the shares or rights. This would not be the intended outcome. 1.246 The new rules ensure this is not the case by allowing the employee share scheme rules to still apply if an arrangement is entered into that results in the original company becoming the subsidiary of another company, or if there is a change in the ownership of the existing company that results in any ESS interests in the old company being replaced, whole or partly, by ESS interests in one or more other companies. [Schedule 1, item 1, subsection 83A-130(1)] 1.247 The roll-over relief will not apply to deferred taxing points that occur outside of corporate restructures. 1.248 A taxing point will still arise when an employee's employment ceases with the employer, when the disposal restrictions expire, or the seven year maximum deferral period occurs, whichever event happens first. 1.249 The provision of roll-over relief for corporate takeovers and restructures was explained in detail in the explanatory memorandum to the Tax Laws Amendment (2004 Measures No. 7) Bill 2004. There have been no policy changes to the operation of those rules. Treat new interests as continuations of old interests 1.250 The interests in the new company that are acquired in connection with the takeover or restructure are treated as a continuation of the original ESS interests. This only applies to the extent that as a result of the arrangement or change, the employee stops holding the old interests and the new interests can reasonably be regarded as matching any of the old interests. The new interests must be ordinary shares or rights over ordinary shares. [Schedule 1, item 1, subsections 83A-130(2) and (4)] 1.251 Matching shares or rights are the replacement shares or rights provided to put the employee in the same position financially after the corporate restructure as before it. Matching shares or rights should be no more than that which is required to place the employee in the same position financially as if the restructure had not occurred. 1.252 The relief is limited to matching shares so that the taxpayer does not receive any additional benefit as a result of the restructure than he or she would otherwise have received. 1.253 It must be possible to identify the shares or rights that the employee holds as a result of the restructure and they must reasonably match the employee's original holding of shares or rights immediately before the restructure. 1.254 While the taxpayer should not receive any additional benefit, there need not be a one-to-one ratio between the old and the new shares or rights in order for them to be matching, provided that the value of the new shares or rights relative to the old shares or rights remains unchanged. 1.255 To be regarded as reasonably matching, the attributes of the shares or rights immediately before the restructure need to be the same, or substantially the same, immediately after the restructure. Attributes include whether it is a share or a right. The replacement of shares for rights, or vice versa, following a restructure would not qualify for roll-over relief as the essential characteristic of the employee's interests (shares or rights) provided after the restructure would have substantially changed. The Explanatory Memorandum to the Tax Laws Amendment (2004 Measures No. 7) Bill 2004 states: | Detailed Reasoning - Matching shares or rights: 3.14 The roll-over relief is limited to shares or rights that can reasonably be regarded as matching the shares or rights in the old company. Matching shares or rights are the replacement shares or rights provided to put the employee in the same position financially after the corporate restructure as before it. Matching shares or rights should be no more than that which is required to place the employee in the same position financially as if the restructure had not occurred. The roll-over relief is limited to matching shares so that the taxpayer does not receive any additional benefit as a result of the restructure than he or she would otherwise have received. [Schedule 3, item 11, subsection 139DQ(1)] 3.15 To be eligible for the roll-over relief, it must be possible to identify the shares or rights that the employee holds as a result of the restructure and they must reasonably match the employee's original holding of shares or rights immediately before the restructure. | Detailed Reasoning - Example AA: Matching the value of shares: Fred acquired 100 shares at a discount under an ESS in Company A in 1999 and deferred his tax liability on the discount. In 2004, Company A shares are valued at $0.50 per share. Following an announcement of a takeover by Company B, the price of Company A shares increases to $1. Company B buys out all shares in Company A. Fred's shares are replaced by 200 Company B shares valued at $0.50 per share. Following the restructure, Fred is employed by Company B. The shares in Company B are matching for the purposes of the roll-over, as they have the same value as the original shares in Company A. (This example assumes no shifting in value from non-ESS shares to ESS shares.) 3.16 While the taxpayer should not receive any additional benefit, there need not be a one to one ratio between the old and the new shares or rights in order for them to be matching, provided that the value of the new shares or rights relative to the old shares or rights remains unchanged. | Detailed Reasoning - Example 3.1: Stanley acquires 200 shares under an ESS in Streetcar Pty Ltd. Busline Pty Ltd then buys out all shares in Streetcar Pty Ltd on the basis of two shares in Busline Pty Ltd for each share held in Streetcar Pty Ltd. As a result of the takeover, Stanley is issued 500 shares in Busline Pty Ltd. He receives 400 shares in exchange for his 200 shares and a further 100 shares by way of an employee bonus. The matching shares are the 400 shares in Busline Pty Ltd. The additional 100 shares that Stanley received are over and above what is required to put him in the same position financially after the restructure as before it. The 400 shares Stanley holds in Busline Pty Ltd are matching for the purpose of accessing the roll-over relief, as these shares have the same value as the old shares. (This example assumes no shifting in value from non-ESS shares to ESS shares.) 3.17 To be matching, the market value of the original shares or rights immediately before the restructure (or a reasonable estimate of the market value of the shares or rights) should be the same or equivalent to the value of the replacement shares or rights as a result of the restructure. | Detailed Reasoning - Example 3.2: Marian acquires 1,000 shares in Pebbles Inc as part of an ESS. Immediately prior to a takeover by Granite Pty Ltd, the shares have a market value of $1 per share. Granite Pty Ltd acquires all shares in Pebbles Inc and gives shareholders two shares in Granite Pty Ltd for one share in Pebbles Inc. As replacement for her shares in Pebbles Inc, Marian was given 1,600 shares in Granite Pty Ltd and $800 in cash. The market value of the replacement share package after the restructure exceeds the value of her old shares by $600. The $600 was by way of an employee bonus. The 1,600 shares in Granite Pty Ltd and only $200 (of the $800) 'match' the original shares, as they are similar in value to the shares held by Marian prior to the takeover. Marian has acquired interests as a result of the restructure that exceed the value of her old shares worth $600. (This example assumes no shifting in value from non-ESS shares to ESS shares.) 3.18 The replacement of old shares or rights with an equivalent combination of new shares and cash is considered to be matching. Where some additional benefit is received as part of the replacement of the shares and rights in the old company following a restructure, the additional benefit is not matching. However, a cessation time will arise to the extent that the old shares or rights are replaced by cash that is matching, as roll-over relief only applies to matching shares or rights that are treated as a continuation of the shares or rights in the old company. [Schedule 3, item 11, subsection 139DQ(2)] 3.19 To be regarded as reasonably matching, the attributes of the shares or rights immediately before the restructure need to be the same, or substantially the same, immediately after the restructure. Attributes include whether it is a share or a right. The replacement of shares for rights, or vice versa, following a restructure would not qualify for roll-over relief as the essential characteristic of the employee's interests (shares or rights) provided after the restructure would have substantially changed. | Detailed Reasoning - Application to this case: The foregoing comments indicate that there must be very minimal differences between the old ESS interests and any replacement interests if they are to meet the requirements to be matching. In this case, there are significant differences between the attributes of the original awards and the Roll-over awards including: • Changes have been made to the vesting conditions - the forfeiture conditions will be removed • Changes have been made to the selling restriction period - the period will be lengthened • Changes have been made to the calculation of the number of assets that will be acquired when the ESS interests vest - there will be no adjustments for dividend equivalents • Changes have been made to the nature of the assets that will be acquired when the ESS interests vest - direct ownership of shares will be replaced with certificates in the Foundation • Changes have been made to the Taxpayer's entitlement to ultimately become the direct owner of shares - this entitlement will be removed • Changes have been made to the type of shares that will underlie the ESS interests - voting shares will be replaced with non-voting shares Each of these changes constitutes a difference in the attributes of the original awards when compared to the Roll-over awards. These differences are of sufficient magnitude to conclude that the Roll-over awards cannot reasonably be regarded as matching the original awards. Most significantly, the Taxpayer loses the right to directly hold shares with voting rights. The Commissioner does not consider the replacement of this entitlement with an indirect interest in non-voting shares to be a situation where it can be said that the new interests can be reasonably regarded as matching the old interests. Consequently, the Commissioner will not confirm that the Roll-over of the original awards into Roll-over awards does not give rise to a deferred taxing point under section 83A-120 of the ITAA 1997 on the basis the Taxpayer's original awards meet the conditions in section 83A-130 and can be considered to be a continuation of the old interests in accordance with subsection 83A-130(2).