Private ruling: ESS- real risk of forfeiture
Date of advice: 12 December 2025
Published: 2 February 2026
Ruling period: Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will Restricted Stock Units ("RSU") issued to the taxpayer which have no additional conditions for vesting other than holding for a period of 36 months be considered to have vested on issue under the Employee Share Scheme Rules in Division 83A of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes

Relevant facts and circumstances: The taxpayer worked for Company A in Country A for approximately X years. The Taxpayer entered into agreements to acquire Restricted Stock Units (RSU's) prior to their retirement. The Performance Hurdle Information stated that there were two portions of the award, RSU's and performance stock units. The number of RSU's were based on an employee's personal performance. The performance stock units were the same starting quantity of the personal RSU's with multipliers based on company performance. The taxpayer has met the performance hurdles required to be entitled to the RSU's, but the award agreement had a clause requiring a 36 month holding period from the date of the grant as follows: "minimum vesting condition: any restricted stock or restricted stock unit that vests solely based on continued service to the company and its affiliates will be subject to a vesting period of at least 36 months from the date of grant, but may be subject to pro-rata vesting over such period." The "Company A Stock Incentive Plan" contains the following key clauses: Section 2: Definitions "Age and service requirements" shall mean the attainment of age 55 and the completion of at least 10 years continuous service with the company and its affiliates. "Restricted Stock Units" means an Award based on the value of Common Stock that is an unfunded and unsecured promise to deliver shares of Common Stock, cash or other property upon the attainment of specific vesting or performance conditions, as specified in the applicable award agreement. Section 5: Eligibility; Awards Generally (a) Eligibility for awards i. General; The Committee may grant Awards under the Plan to Eligible Individuals. The Committee's selection of a person to participate in the Plan at any time shall not require the Committee to select such person to participate in the Plan at any other time. ... (c) Minimum Vesting Condition . Any Restricted Stock or Restricted Stock Unit that vests based on the achievement of Performance Goals will be subject to an Award Cycle of at least twelve months from the date of grant. Any Restricted Stock or Restricted Stock Unit that vests solely based on continued service to the Company and its Affiliates will be subject to a vesting period of at least 36 months from the date of grant, but may be subject to pro-rata vesting over such period. Notwithstanding the foregoing, (A) the Committee may provide for the satisfaction and/or lapse of all vesting conditions under any such Award in the event of the Participant's death, disability, retirement or termination of Continuous Service or in connection with a Change in Control, and (B) the Committee may provide that any such restriction or limitation will not apply in the case of a Restricted Stock or Restricted Stock Unit that is issued in payment or settlement of compensation that has been earned by the Participant. Notwithstanding the foregoing, up to 5% of the aggregate number of shares of Common Stock authorized for issuance under the Plan as set forth in Section 4(a)(1) may be issued pursuant to Restricted Stock and/or Restricted Stock Units without respect to the 12-month or 36-month restrictions described in this Section 5(c). Section 8: Restricted Stock and Restricted Stock Units (a) Grant . The Committee may grant Awards of Restricted Stock or Restricted Stock Units to any Eligible Individual, subject to such terms and conditions as may be determined by the Committee. Awards of Restricted Stock Units may be settled in cash, shares of Common Stock, or a combination thereof. Awards of Restricted Stock and Restricted Stock Units shall be evidenced by Award agreements, the terms and provisions of which may differ. The "Restricted Stock Unit award Agreement: Company A Stock Incentive Plan" document contains the following key clauses: 2. Vesting of Units. Subject to Sections 3, 4 and 5 below, the Units shall vest in accordance with the vesting schedule set forth in the Notice and shall immediately cease to vest upon the date the Grantee's Continuous Service is terminated for any or no reason (such date, the "Termination Date"), with any Units that remain unvested as of the Termination Date to be immediately cancelled and forfeited by the Grantee. 3 Termination of Continuous Service ... b. Age and service Requirements i. default rule: In the event Grantee's continuous Service terminates after the Grantee has satisfied the Age and Service requirements, the Units, to the extent not already vested, shall become fully vested as of the Termination Date, and shall be settled in accordance with the schedule set forth in section 6 hereof as if the Grantee had remained in Continuous service through the last day of the vesting period set forth in the notice.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 83A | Income Tax Assessment Act 1997 Subdivision 83A-B | Income Tax Assessment Act 1997 Subdivision 83A-C | Income Tax Assessment Act 1997 subsection 83A-10(1) | Income Tax Assessment Act 1997 subsection 83A-10(2) | Income Tax Assessment Act 1997 subsection 83A-25(1) | Income Tax Assessment Act 1997 subsection 83A-105(1) | Income Tax Assessment Act 1997 subsection 83A-105(3)

Reasons for decision: Summary: Division 83A of the ITAA 1997 provides the rules on shares, rights and stapled securities you acquire under an employee share scheme. All further legislative references are to the ITAA 1997 unless otherwise stated. Subsection 83A-10(1) states that an ESS interest in a company is a beneficial interest in a share in the company or a right to acquire a beneficial interest in a share in the company. Subsection 83A-10(2) states that an employee share scheme is a scheme under which ESS interests in a company are provided to employees or associates of employees, (including past or prospective employees) of the company or subsidiaries of the company in relation to the persons employment. Pursuant to subsection 83A-25(1), any discount an employee receives from their ESS interest acquired under an employee share scheme will be included in the employee's assessable income. The taxing point depends on the conditions of the scheme: • immediate - on the acquisition of beneficial interest in the shares or rights so that Subdivision 83A-B applies, or • deferred - subject to other conditions, but most commonly when there is a real risk that the shares or rights might be forfeited or lost, in which case, Subdivision 83A-C applies. Subsection 83A-105(1) provides the circumstances when subdivision 83A-C applies to an ESS interest in a company, and subdivision 83A-B does not. It states the following: (1) This Subdivision applies, and Subdivision 83A - B does not apply, to an ESS interest in a company if: (a) Subdivision 83A - B would, apart from this section, apply to the interest (see section 83A - 20); and (aa) after applying section 83A - 315, there is still a discount given in relation to the interest; and (ab) section 83A - 33 (about startups) does not reduce the amount to be included in your assessable income in relation to the interest; and (b) subsections 83A - 45(1), (2), (3) and (6) apply to the interest; and (c) if the interest is a beneficial interest in a share: (i) subsection (2) of this section applies to the interest; and (ii) subsection (3) or (4) applies to the interest; and (d) if the interest is a beneficial interest in a right to acquire a beneficial interest in a share--subsection (3) or (6) applies to the interest. Subsection 83A-105(2) relates to the broad availability of the Employee Share Scheme. Subsection 83A-105(3) is in relation to the real risk of losing an interest or share under the conditions of the Employee Share Scheme. It states that subsection 83A-105(3) will apply if there is a real risk that, under the conditions of the scheme, a taxpayer will forfeit or lose the ESS interest. The provision is to be interpreted by considering the ordinary meaning of the words having regard to the legislative context and the object or purpose of Division 83A. 'Real' is defined in The Australian Oxford Dictionary, 1999, Oxford University Press, Melbourne as 'actually existing as a thing or occurring in fact' and 'genuine; rightly so called; not artificial or merely apparent'. The Explanatory Memorandum (EM) to the Tax Laws Amendment (2009 Budget Measures No.2) Bill 2009 notes the policy position that deferred taxation should generally apply where the taxpayer may ultimately never realise the economic value of the ESS interest or share. The EM states the purpose of having a real risk of forfeiture test to qualify for treatment under Subdivision 83A-C of the ITAA 1997 as follows: Providing for the deferral of tax in these situations recognises that the employee may never have a chance to recognise the economic value of the ESS interest, and that having employee remuneration 'at risk' in this manner is consistent with the purpose of concessionally taxing employee share schemes, namely to align the interests of employees and employers. The EM explains the real risk of forfeiture test at paragraph 1.156 and 1.158: The 'real risk of forfeiture test' does not require employers to provide schemes in which their [ESS interests] are at significant or substantial risk of being lost. However, real is regarded as something more than a mere possibility. Something is not a real risk if a reasonable person would disregard the risk as highly unlikely to occur or as nothing more than a rare eventuality or possibility. ... The 'real risk of forfeiture' test is intended to provide for deferral of tax when there is a real alignment of interests between the employee and employer, through the employee's benefits being at risk. The test is a principle based test, intended to deny deferral of tax where schemes contrive to present a nominal risk of forfeiture without complying with the intent of the proposed law. ATO Interpretive Decision ATO ID 2010/61 Income Tax Employee share scheme: real risk of forfeiture- minimum term of employment and good leaver provisions (ATO ID 2010/61) contains the ATO view on the meaning of the real risk of forfeiture. ATO ID 2010/61 states that for the 'real risk of forfeiture' condition to be met for an ESS interest acquired by an employee under an employee share scheme, a reasonable person must consider that: • there is an actual possibility of forfeiture - if under no circumstance will the employee forfeit or lose the ESS interest it will not be an interest to which Subdivision 83A-C of the ITAA 1997 applies; and • the risk of forfeiture is 'real' - that is, it must be genuine; not nominal; not artificial, apparent or contrived and the risk must not be a 'mere' possibility or 'rare' eventuality. In considering whether a condition in a scheme imposes a real risk of forfeiture, regard should be had to whether a reasonable person would consider that there is a genuine connection between the forfeiture condition and aligning the interests of the employee and employer. If the risk of forfeiture is over a very short period of time to gain access to a relatively long period of deferral the risk will not be considered real. ATO ID 2010/61 also states that good leaver conditions that allow rights to be retained in the event of death, invalidity or bona fide redundancy do not prevent the rights being at a real risk of forfeiture provided that the scheme is operated in accordance with the conditions and employees do not routinely receive the benefit of the rights regardless of their reason for ceasing employment. The note in ATO ID 2010/61 contemplates a circumstance where an employee has satisfied the age and service requirements of a scheme and there is no minimum term of employment condition once the agreement is entered into and states that in those circumstances, there would be no real risk of forfeiting or losing the rights because they could cease employment at any time and in any circumstance and the rights would not be forfeited. Paragraph 1.160 of the EM also explains: A condition that merely restricts an employee from disposing of a share or right for a specified time carries with it no real risk of forfeiture. That is, a restriction on disposal for a period of time does not expose the employee to not ever having the chance to recognise the economic value of the ESS interest or share. It merely defers the point in time when disposal may occur. Application to your circumstances The taxpayer had met the age and service requirements when the RSU agreement was entered into and the holding period rule merely restricts the taxpayer from disposing of the RSUs for a period of 36 months. Further, the taxpayer could cease employment at any time by retiring and the RSUs would not be forfeited. Therefore, applying paragraph 1.160 of the EM and the note to ATO ID 2010/61, the RSUs are not subject to a real risk of forfeiture. This means subdivision 83A-C does not apply and for the purpose of Division 83A, the RSUs will be considered to have vested at the time of issue.