Private ruling: An employee share scheme (ESS)
Date of advice: 26 March 2019
Published: May 2019
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is the date of acquisition for shares gained under an employee share scheme the same as the deferral date for income tax purposes? | A1: Yes.

Relevant facts and circumstances: You are an employee and you are entitled to rights to acquire shares in the company under an Employee Share Scheme (ESS). The rights will convert to shares of capital after a vesting period finalises under the agreement. During this period your rights are restricted and you cannot dispose of the rights to another entity. Your employer has a policy whereby employees are restricted from trading or disposing of shares during certain periods of the calendar year (a closed trading window). This is also a term of the ESS agreement.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 83A-120 | Income Tax Assessment Act 1997 section 83A-125

Reasons for decision: Summary: Subsection 83A-120(2) of the Income Tax Assessment Act 1997 (ITAA 1997) states that the ESS deferred taxing point for the ESS interest is the earliest of the times mentioned in subsections (4) to (7). However, the ESS deferred taxing point for the ESS interest is: (a) The time you dispose of the ESS interest (other than by exercising the right), or (b) If you exercise the right – the time you dispose of the beneficial interest in the share if that time occurs within 30 days after the time worked out in subsection (2) (subsection 83A-120(3) ITAA 1997). The first possible taxing point is the earliest time when: (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 (subsection 83A-120(4) ITAA 1997). The second possible taxing point is the time when the employment in respect of which you acquired the interest ends (subsection 83A-120(5) ITAA 1997). The third possible taxing point is the end of the 15 year period starting when you acquired the interest (subsection 83A-120(6) ITAA 1997). The fourth possible taxing point is the earliest time when: (a) you exercise the right;,and (b) (Repealed) (c) there is no real risk that, under the conditions of the scheme, after exercising the right, you will forfeit or lose the beneficial interest in the share (other than by disposing of it), and (d) if, at the time you acquired the ESS interest, the scheme genuinely restricted you immediately disposing of the beneficial interest in the share if you exercised the right – the scheme no longer so restricts you (subsection 83A-120(7) ITAA 1997). For the purposes of the ITAA 1997 (other than Division 83A), the ESS interest (and the share or right of which it forms part) is taken to have been acquired immediately after the ESS deferred taxing point for the interest for its market value, unless the ESS deferred taxing point occurs at the time the interest is being disposed of (section 83A-125 of the ITAA 1997). | Detailed Reasoning - Application to your circumstances: You acquired rights under an ESS agreement with your employer, which you could exercise to convert the interest to shares after a vesting period. During this period you ran a real risk of forfeiture of the rights if any one of a set of conditions was met (other than by you disposing of them). You were restricted fro m disposal of the rights prior to conversion to shares. After the rights had been converted to shares, there was no longer a risk that they could be forfeited under the agreement. However, you were genuinely restricted from disposing of them until a time when the trade window opened for employees. You are taken to have acquired the shares on the deferral date, for their market value on that date as per subsection 83A-120(7) ITAA 1997.