Private ruling: ESS interests and ordinary shares
Date of advice: 8 February 2021
Published: March 2021
Ruling period: 1 July 20xx to 30 June 20xx | 1 July 20xx to 30 June 20xx

Ruling: Q1: Are Company A's B Shares ordinary shares for the purposes of subsection 83A-45(2) of the Income Tax Assessment Act 1997 ? | A1: Yes.

Relevant facts and circumstances: Company A is a company based in the Country A. Company B is a wholly owned subsidiary of Company A. Company B employs Australian resident individuals. Shareholding of Company A Company A has ordinary A and B shares on issue as well as preference shares. B Shares rank equally with the A Shares on issue, including the right to a distribution of the profits on a pro rata basis with other shareholders. However, B Shares do not carry voting rights. Upon liquidation, A and B shares have the right to a return of proceeds equal in portion to the holders of the other shares. However, preference shares have a priority to distributions in the event of winding up. Employee share plan Company A has an employee share plan (Plan) under which employees or Company A and Group Members may be granted the option to acquire shares in Company A (Options). Company A has granted Options to Australian resident employees of Company B for nil consideration: Under the Plan, if the Options vest the Australian resident employees will be issued with ordinary B shares following exercise of the Options on or before the expiry date. The Plan is an Enterprise Management Incentive (EMI) scheme for the Country A tax purposes. EMI schemes are intended to be used by small to medium enterprises in the Country A to incentivise their employees. Like an Australian employee share option scheme, an EMI scheme allows the business to: (a) attract and retain key employees; (b) align the interests of the employees and the company by giving employees a sense of ownership in the company; and (c) reward employees who assist in developing the business. Other relevant clauses of the Articles of Association are clauses relating to Share Capital, Dividends and preference of distribution in the event of winding up.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 83A | Income Tax Assessment Act 1997 Subdivision 83A-A | Income Tax Assessment Act 1997 Subsection 83A-10(1) | Income Tax Assessment Act 1997 Subdivision 83A-B | Income Tax Assessment Act 1997 Subsection 83A-45(2) | Income Tax Assessment Act 1997 Subdivision 83A-C

Reasons for decision: Summary: Division 83A provides for the taxation of ESS interests acquired under employee share schemes at a discount. An ESS interest in a company is defined in subsection 83A-10(1) as a beneficial interest in either a share in the company, or a right to acquire a beneficial interest in a share in the company. Subsection 83A-45(2) is one of the conditions required to be satisfied for either the up-front tax concession in Subdivision 83A-B or the deferral concession in Subdivision 83A-C to apply. Subsection 83A-45(2) provides that when an ESS interest is acquired, all the ESS interests available for acquisition under the relevant employee share scheme must relate to ordinary shares and it must be satisfied ATO Interpretative Decision ATO ID 2010/62 Income Tax - Employee share scheme: whether interest in a corporate limited partnership are ordinary shares sets out the ATO-view on what the relevant inquiry is in determining whether (or not) a share is an ordinary share for the purposes of Divisions 83A. It states: Whether a share is an ordinary share in a company for the purposes of the condition in subsection 83A...of the ITAA 1997 is to be determined by considering the rights attached to the share in relation to distributions of profits and capital and on winding up of the company, as compared to other shares in the company. Shares that have a priority as to dividends or distributions in the event of winding up are preference shares. If shares are not preference shares, they are ordinary shares (emphasis added). The Commissioner is satisfied that the ordinary B Shares are 'ordinary' shares for Division 83A purposes, as B Shares: • entitle the holders of the B Shares the right to a distribution of the profits on a pro rata basis with the other shareholders; and • upon liquidation entitle the holders of the B shares to a return of proceeds equal in portion to the holders of the other shares, however, it is only after the preference shares receive their returns that the A and B class shareholders receive a return of capital. Finally, the Commissioner notes that whilst the preference shares and ordinary A and B shares rank pari pasu in all respects with each class constituting a separate class of shares, both the ordinary A class and ordinary B class shares rank pari passu except that the ordinary B class shares do not carry voting rights. Accordingly, applying the Commissioner's view in ATO ID 2010/62, the Commissioner is satisfied that the B shares are ordinary shares for the purposes of section 83A-45(2) and Division 83A.