Private ruling: Employee share scheme.Company takeover.Cessation time.Continuation of shares
Published: May 2012
Ruling period: Year ended 30 June 2009
Date scheme commenced: 1 July 2008

Ruling: Q1: Will your X Banking Corporation shares be treated as a continuation of your Y Bank Limited shares? | A1: Yes


Relevant legislative provisions: Income Tax Assessment Act 1936 Division 13A | Income Tax Assessment Act 1936 Section 139B | Income Tax Assessment Act 1936 Section 139C | Income Tax Assessment Act 1936 Section 139CA | Income Tax Assessment Act 1936 Section 139C | Income Tax Assessment Act 1936 Section 139E | Income Tax Assessment Act 1936 Section 139DQ | Income Tax Assessment Act 1936 Section 139DR | Income Tax Assessment Act 1936 Section 139GCB | Income Tax Assessment Act 1997 Paragraph 130-83(1)(a) | Income Tax Assessment Act 1997 Section Division 83A | Income Tax (Transitional Provisions) Act 1997 Subdivision 83 A-B | Income Tax (Transitional Provisions) Act 1997 Section 83A-10

Reasons for decision: Detailed Reasoning - Employee share schemes: Division 83A of the Income Tax Assessment Act 1997 (ITAA 1997) deals with the taxation of discounts on shares, rights and stapled securities acquired under employee share schemes (ESS) after 1 July 2009. This Division replaced the previous ESS provisions outlined in Division 13A of the Income Tax Assessment Act 1936 (ITAA 1936) and the former subsection 26AAC of the ITAA 1936. Depending on the date of the original grant, the ESS interests may be taxed under the Division 83A policy, or the transitional rules that preserve the operation of the previous regimes. The Income Tax (Transitional Provisions) Act 1997 (ITTPA 1997) extend the application of Div 83A to employee share scheme interests acquired before 1 July 2009, on which tax was deferred beyond 1 July 2009 under the previous regimes, but certain parts of the tax policy from the previous regimes are preserved by the ITTPA 1997. Subdivision 83A-B of the ITTPA 1997 provides guidance on the application of the former employee share scheme provisions of Division 13A of the ITAA 1936. Section 83A-10 of the ITTPA 1997 provides that this section will apply when Division 13A of the ITAA 1936 applied to the shares or options prior to it being repealed. In those cases, to avoid doubt, section 83A-10 of the ITTPA 1997 outlines that the former Division 13A will continue to apply, in spite of its repeal, to the share or right. Under Division 13A of the ITAA 1936, an employee acquires shares or rights under an ESS if the shares or rights were acquired in respect of, or in relation directly or indirectly to, any employment of the employee and the consideration to the acquisition is less than the market value of the shares or rights at the time you acquired them. An election under section 139E of Division 13A of the ITAA 1936 can be made by an employee in respect of the qualifying shares or qualifying rights. The effect of making an election is that the discount given in respect of the shares or rights is included in the employee's assessable income in the year of acquisition. If an election is not made, the discount is included in the employee's assessable income when cessation time occurs. Division 13A of the ITAA 1936 provides that when there are no disposal restrictions or forfeiture conditions, cessation time will occur on the date the shares are acquired. When there are disposal restrictions or forfeiture conditions in relation to the shares, Division 13A of the ITAA 1936 provides that cessation time will occur in relation to qualifying shares at the earliest of: · Disposal time of the share; · The later time of when disposal restrictions end and the time when the relevant forfeiture conditions end; · Cessation of employment in respect of which the share was acquired; or · 10 years from the date of acquisition. Cessation time for qualifying rights will occur at the earliest of the following events occurring: · Disposal of right, other than by exercising it; · Cessation of employment in respect of which the right was acquired; · Time when disposal restrictions or forfeiture conditions end, if right exercised; · Time when right exercised if no disposal restrictions or forfeiture conditions; or · 10 years after right was acquired. | Detailed Reasoning - Conditions for the continuation of shares: A 100% takeover or a corporate restructure may give rise to cessation time occurring under section 139CA of the ITAA 1936, thus triggering a taxing event for an employee who would otherwise have had a tax on their qualifying share or qualifying right under the ESS deferred for up to 10 years. Section 139DQ of the ITAA 1936 provides for new shares or rights issued in a 100% takeover or restructure of the old company as a continuation of the old shares or rights for Div 13A purposes, thereby avoiding the triggering of cessation time and taxing point. The roll-over is available to a taxpayer who has acquired shares or rights under an ESS, but has deferred being taxed on the discount, and who faces a taxing point resulting from the restructure of the entity in which the taxpayer is employed. For the purposes of Division 13A of the ITAA 1936, roll-over relief will be provided by treating the employees: · Matching shares or rights as if they were a continuation of the shares or rights in the old company: and · Employment with the new company as a continuation of the employment in the old company. However, mere matching is insufficient to access the rollover relief. The following conditions imposed by section 139DR of the ITAA 1936 must also all be met: The old shares or rights that were held by the taxpayer immediately before the 100% takeover or restructure were actually held under an ESS; If the taxpayer has not already made an election under s 139E to be assessable on the discount upfront, the taxpayer is an employee of the new company (or its holding or other group companies) at the time the taxpayer acquires the matching shares or rights; The matching share (new share) must only be ordinary shares and the matching right (new right) must only be rights to acquire ordinary shares; and. At the time the taxpayer acquires the matching shares or rights, the taxpayer must not: Hold a legal or beneficial interest in more than 5% of the shares in the new company; or Be in a position to cast, or control the casting of, more than 5% of the votes at a general meeting of the new company. As mentioned above, the roll-over relief applies to the extent that the employee receives matching shares or rights in the new company in exchange for the shares or rights they owned in the old company. The Explanatory Memorandum to the Tax Law Amendment (2004 Measures No 7) Bill 2004 (the EM) provides further guidance on the issue of what are viewed as matching shares or rights. The EM provides that when the roll-over applies, the new shares or rights will be treated as a continuation of the shares or rights in the old company, meaning that the replacement of the shares or rights will not be treated as a disposal of the share or rights in the old company, or as an acquisition of shares or rights in the new company. Paragraph 3.25 of the EM provides that the roll-over also provides for a continuation of employment in the new company in that the employee is regarded as having continued their employment in the new company. Paragraph 3.19 of the EM outlines that replacement of shares for rights, or vice versa, 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. Paragraph 3.20 of the EM provides that the tax treatment of non-matching shares or rights immediately after a corporate restructure will be determined on the basis of the application of the existing law and will depend on the circumstances in each case. | Detailed Reasoning - Conclusion: In your case, you participated in an number of ESS offered by your employer under which you were granted interests over a number of years. In accordance with the ITTPA 1997, Division 83A of the ITAA 1997 is extended to cover your ESS interests as they were acquired before 1 July 2009, on which tax was deferred beyond 1 July 2009, and for Division 13A of the ITAA 1936 to apply. You did not make an election in relation to your ESS interests and cessation time would have occurred in relation to your ESS interests when the takeover occurred, Therefore, the roll-over is available to you and you have made the choice for the roll-over to apply to your ESS interests. To the extent that you have received X ordinary shares in exchange for your Y ordinary shares, it will be viewed that a continuation of your original Y shares will apply as your new X shares are matching, and the other conditions have been met and cessation time will not have occurred as a result of the receipt of the replacement X shares. Therefore, you can continue to defer declaring the discount in relation to your shares as income for up to 10 years after the time you acquired your original Y shares, or when the earliest cessation time event occurs. Note: If you received X shares in exchange for Y rights, the roll-over will not apply as it cannot be viewed that you have received matching interests. It will be viewed that cessation time has occurred in relation to any Y rights as you will be viewed as having disposed of them other than by exercising them. Therefore, the discount amount in relation to any X rights should have been included in your 2008-09 income tax return, the income year in which the takeover occurred. | Detailed Reasoning - Relevant facts: While you were employed by Y Bank Limited (Y), you participated in a number of employee share schemes (ESS) offered by the bank. You were granted a number of interests on various dates over an extended period of time. You elected for your shares acquired as a result of your vested Award Options and vested Executive Options to remain under a disposal restriction for a period of up to ten years from the date of the original grant of the options. You did not make an election in relation to your Y ESS interests. You exercised a number of your Y interests prior to 1 December 2008 and were issued ordinary fully paid Y shares: On 1 December 2008, Y merged with the X Banking Corporation (X). Under the merger arrangement, unvested Y shares vested and were converted at a rate of 1.31 new X share for each Y share held. As a result of the merger, your unvested Y awards were converted to X ordinary shares. You made the roll-over choice when the merger occurred. You were employed by X after the takeover in a role similar to one you held in Y prior to the takeover. You have provided copies of a number of documents, which forms part of, and should be read in conjunction with this private ruling.

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