Private ruling: Employee Share Schemes
Published: March 2018
Ruling period: Year ended 30 June 2017 | Year ending 30 June 2018
Date scheme commenced: 1 July 2016

Ruling: Q1: Will the Company satisfy the start-up conditions in section 83A-33 of the Income Tax Assessment Act 1997 in relation to an employee share scheme? | A1: Yes

Relevant facts and circumstances: A company (the Company) conducts a business (the Business). The Company’s annual turnover is less than $10 Million. The Company is an Australian resident for tax purposes. The Company was incorporated on XX/XX/2015 and is a private family-owned company. The Company owns all 100% of ordinary shares in Company B. Company B was incorporated on XX/XX/2016. The Company and its corporate group have never been listed on the stock exchange. The business wishes to incentivise its key employees under an Employee Share Scheme (ESS) to encourage their long term commitment to the Business. The employee share scheme will provide key employees with an opportunity to acquire and benefit from the Company’s growth. The ESS will also assist the Company in aligning the interests of employees with the Business and remunerating employees with non-cash incentives. The Company will only issue ordinary shares or Options to acquire ordinary shares, or rights (including options) to acquire ordinary shares. The ESS interests will be held for a minimum holding period of three years (commencing the date the ESS interests were acquired) or until employment ceases. In the case of an ESS for Options, the exercise price will not be less than the market value of shares in the company at the date of grant of the Options. In the case that the ESS is a share plan, the shares will not be offered for more than a 15% discount on the market value of the shares at the date of grant.

Relevant legislative provisions: Income Tax Assessment Act 1997 Paragraph 83A-33(1), | Income Tax Assessment Act 1997 Paragraph 83A-33(2), | Income Tax Assessment Act 1997 Paragraph 83A-33(3), | Income Tax Assessment Act 1997 Paragraph 83A-33(4), | Income Tax Assessment Act 1997 Paragraph 83A-33(5), | Income Tax Assessment Act 1997 Paragraph 83A-33(6) and | Income Tax Assessment Act 1997 Section 83A-45.

Reasons for decision: Summary: Under changes made to the Tax Act, effective from 1 July 2015, special concessional tax rules apply to Employee Share Schemes (ESS) that fall within the ‘ESS start-up concession’ rules. To be eligible for the ‘start-up’ tax concession, each of the company, the ESS, and the employee must meet certain eligibility criteria. Under subdivision 83A-B of the ITAA 1997, the start-up conditions are as follows: a) The company, and all group companies, must not have equity interests listed for quotation in the official list of any approved stock exchange; b) The company, and all group companies, were incorporated less than 10 years before the end of the company’s most recent income year; c) The company must have an aggregated turnover not exceeding $50 Million for the company’s most recent income year; d) A share must be issued at no greater than a 15% discount of its market value and an option must be issued at an amount greater than or equal to the market value of an ordinary share; e) The employing company must be an Australian resident company; and f) The minimum holding period under the employee share scheme must be three years (and the scheme must restrict disposal of the interest during this period) or until employment ceases. In this case, the Company and Company B were incorporated less than 10 years before the end of the Company’s most recent income year. The Company and Company B have never been listed on the stock exchange, nor has the Company had an aggregated turnover exceeding $50 Million. The Company and Company B are both Australian resident companies. Accordingly, the Company will be entitled to the start-up concession contained in section 83A-33 of the ITAA 1997 if the Company also satisfies the other requirements in section 83A-45 of the ITAA 1997, as set out in subdivision 83A-B of the ITAA 1997.

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