Private ruling: Employee Share Scheme
Date of advice: 16 October 20FF
Published: March 2018
Ruling period: Year ended 30 June 20AA | Year ended 30 June 20BB | Year ended 30 June 20CC | Year ended 30 June 20DD | Year ended 30 June 20EE | Year ended 30 June 20FF | Year ended 30 June 20GG
Date scheme commenced: DDMMYY

Ruling: Q1: If the Participant becomes a bad leaver (as defined under Clause X of the Plan Rules) and forfeits their interest in the Plan Shares (‘ Plan Shares ’), will the Participant be entitled to amend their income tax return for the year ended 30 June 20AA, due to the combined operation of section 83A-310 of the ITAA 1997 and item 26 in the table in subsection 170(10AA) of the ITAA 1936? | A1: Yes | Q2: If the Participant remains employed (or is a good leaver as defined under Clause X of the Plan Rules) and the Plan is terminated under Clause X of the Plan Rules and the Participant forfeits their interest in the Plan Shares as a result, will the Participant be entitled to amend their income tax return for the year ended 30 June 20AA, due to the combined operation of section 83A-310 of the ITAA 1997 and item 26 in the table in subsection 170(10AA) of the ITAA 1936? | A2: No | Q3: If the Participant remains employed (or is a good leaver as defined under Clause X of the Plan Rules) and the Plan is terminated under Clause X of the Plan Rules (after the Participant signs a Deed of Termination) and the Participant forfeits their interest in the Plan Shares as a result, will the Participant be entitled to amend their income tax return for the year ended 30 June 20AA, due to the combined operation of section 83A-310 of the ITAA 1997 and item 26 in the table in subsection 170(10AA) of the ITAA 1936? | A3: No | Q4: If the Participant remains employed (or is a good leaver as defined under Clause X of the Plan Rules) and the Participant’s interest in the Plan Shares is handed over to the Management Committee after the expiration of the Tax Loan Agreement, will the Participant be entitled to amend their income tax return for the year ended 30 June 20AA, due to the combined operation of section 83A-310 and item 26 in the table in subsection 170(10AA) of the ITAA 1936? | A4: No | Q5: If the Participant forfeits their shares because the Plan is terminated (in the circumstances outlined in Questions 2, 3 or 4) and the answer to Questions 2, 3 and 4 is no, will the Participant make a capital loss equal to the market value of the shares on the date of grant? | A5: Yes

Relevant facts and circumstances: Facts describing the scheme or circumstances AusCo structure ForeignCo currently holds a majority of AusCo shares indirectly via wholly owned subsidiaries. The remaining 25% of AusCo is held by AusCo’s employees via two employee share trusts. AusCo is the head company of a tax consolidated group consisting of it and several wholly owned subsidiaries. Australian Company Pty Ltd (AusCo) established the AusCo Employee Share Plan (the Plan) to assist in the reward, attraction, retention and motivation of AusCo employees. The purpose of the Plan can be summarised as follows: ● to provide Participants with a reward for their ongoing contribution to the achievement by AusCo of long term strategic goals; ● to provide Participants with a reward for the work undertaken to get the business to the position where it was purchased by ForeignCo; ● to align the interests of Participants and shareholders through the sharing of a personal interest in the future growth and development of AusCo as represented by the price of AusCo securities; ● to provide a means of attracting and retaining skilled and experienced employees; and ● to allow employees to participate in the equity of AusCo as detailed below. AusCo Employee Share Plan (the Plan) The Plan does not reflect any legal transfer of intellectual property by employees but, rather, recognises the know-how inherent in the skilled employee workforce. The scheme was intended to facilitate the retention and maximum utilisation of this know-how for the benefit of the company. AusCo allowed employees to participate in the equity of AusCo as follows: 1. AusCo irretrievably contributed funds to the Trust to fund the acquisition of shares by employees participating in the Plan. The potential beneficiaries of the Trust are the employees of the AusCo group. The Trustee is an external independent organisation, Trustee Pty Limited. 2. The Trustee subscribed for and acquired new shares in AusCo (Plan Shares) at their fair market value. The Trustee is the registered legal owner of the Plan shares. The rights attached to the Plan Shares have been outlined in further detail below. 3. The Management Committee of AusCo then determined which employees of both AusCo and its wholly owned subsidiaries were eligible to participate in the Plan. 4. Invitations were made to such employees to participate in the Plan. 5. The Plan Shares were offered to the employees for nil price. 6. A put option was offered to employees for a nominal amount of $XX per participant. 7. Employees were required to personally fund the cost of the put option (being $XX per participant). 8. The employees, who accepted the invitation to participate, were provided with a fixed interest in the Trust. 9. The Trustee then designated Plan Shares in AusCo as allocated to particular employees corresponding to the employee’s interest in the Trust. The employees are absolutely and beneficially entitled to the Plan Shares from the time of allocation. 10. AusCo undertook a valuation to confirm the fair market value of the Plan Shares to be acquired by the Trustee for the benefit of employees. However, this valuation did not impact the offer price of nil. 11. The employees paid income tax under Division 83A upon allocation of Plan Shares under the Trust at the confirmed market value. As the Plan Shares were being offered to less than 75% of permanent employees, there was no deferral of the tax payable upon the allocation of shares (refer to section 83A-105(1)(c)). 12. As there was an upfront taxation liability, the majority of employees accepted a loan from a wholly owned subsidiary of AusCo in order to facilitate the payment of this taxation liability (Tax Liability Loan). In order to accept the offer, the employee had to enter into a Tax Liability Loan agreement and the proceeds of the loan were explicitly used for funding the employee’s tax liability. The loan was provided, at the time when the employee’s tax liability became payable, i.e. upon lodgement of their 30 June 20AA income tax returns. The loan is an interest free, limited recourse loan which only becomes due and payable upon disposal of the Plan Shares. 13. Two employees (including the Taxpayer) only accepted a loan for a portion of their tax liability rather than the full upfront taxation liability arising as a result of the application of Division 83A. In all other respects, the partial loan was made on the same terms as the other employees as outlined above. 14. Dividends may be paid on the Plan Shares held by the Trust and flow through to the employees. However, no dividends have been paid to date due to the poor performance of the business. 15. If a trade sale or listing occurs, employees will not be required to have met any performance or vesting conditions and will be entitled to dispose of their shares as part of the transaction. 16. Whilst the directors of AusCo will use their best efforts to provide liquidity so that the employees’ interests in the shares can be cashed out via a trade sale or stock exchange listing, the put option creates another liquidity opportunity for employees in the event a trade sale or stock exchange listing does not occur. 17. Employees, who leave the employ of the AusCo group, will be classified as either ‘good’ or ‘bad’ leavers. Each departing Participant is classified having regard to their particular facts and circumstances. However, broadly a Participant would normally be classified as a good leaver if they retired or were made redundant, whereas a bad leaver would typically be someone who resigns and/or is employed by a competitor. In determining good and bad leaver status regard is also had to the Participant’s contribution to the Company, e.g. length of employment, etc. 18. If an employee becomes a good leaver they may retain their interest subject to the discretion of the Management Committee, pursuant to Clause X of the Plan Rules, which provides that: If the Management Committee determines that a Participant is a Good Leaver: (a) At the Management Committee’s sole and absolute discretion the Participant may retain an interest in any or all of the Plan Shares, subject to the satisfaction of any relevant Vesting Conditions as at the date that the Participant becomes a Good Leaver and on such other terms and conditions as the Management Committee sees fits; and (b) Any Plan Shares not covered by the terms of Clause X will be at the Board's discretion i. subject to a Buy-Back in accordance with Clause X; ii. subject to Cancellation in accordance with Clause X; or iii. forfeited by the Participant in accordance with Clause X for an amount equal to the purchase price payable on completion of the Put Option 19. If an employee becomes a bad leaver, the Plan Shares will be cancelled or bought back by AusCo at a payout value as determined under the Plan Rules, pursuant to Clause X, which provides that: If the Management Committee determines that a Participant is a Bad Leaver, the Participant's interest in the Plan Shares will be forfeited and at the Board's discretion: a) subject to a Buy-Back in accordance with Clause X; b) subject to Cancellation in accordance with Clause X; or c) forfeited by the Participant in accordance with Clause X, for an amount equal to Nominal Consideration; and d) to the extent that any part of the Participant's Tax Liability Loan remains outstanding, then the Participant will not be liable to repay the outstanding Tax Liability Loan balance to the Company or relevant member of the Group. 20. Employees are liable for the full loan balance outstanding to the wholly owned subsidiaries of AusCo at the time the Plan Shares are disposed of. If there is a shortfall between the payout value of the Plan Shares and the remaining balance of the related loan, the loan balance would not need to be repaid as the recourse is limited to the share value. AusCo, its wholly owned subsidiaries, and the Trust are all residents of Australia for income tax purposes. Operation of the Trust The Trust was established on DDMMYY. Its sole purpose is to subscribe for, acquire, allocate, hold and deliver shares under the Plan for the benefit of AusCo employees, pursuant to Recitals Paragraph B and Clause X of the Trust Deed. In respect of any shares to be provided under the Plan, the Management Committee may direct the Trustee to subscribe for shares and AusCo must issue shares to be held on behalf of the Participant, pursuant to Clause X of the Trust Deed. Pursuant to Clause X of the Trust Deed, the Trustee has at the direction of the Management Committee subscribed for and allocated Plan Shares under the Plan on behalf of the relevant Participants. The Plan Shares continue to be held in the name of the Trustee. However, the Participants have a beneficial interest in the Plan Shares. Plan Shares acquired by the Trustee will be transferred to the relevant Participant, where required to do so, or permitted, by the relevant Plan Rules as soon as reasonably practicable, pursuant to Clause X of the Trust Deed. The Trustee can sell Plan Shares on behalf of a Participant where permitted under the relevant Plan Rules at the direction of the Participant, pursuant to Clause X of the Trust Deed. Rights attaching to the Plan Shares The Plan Shares will have the following features: 1. After three years, an entitlement to dividends when paid to Plan shareholders in AusCo. The Board reserves the right to determine the level of dividends payable compared to ordinary shares. Note, however, that the rate of dividends would generally be the same, on all classes except in special circumstances, pursuant to Clause X of the Trust Deed. Further, under the management agreement the shareholders agreed not to declare a dividend for the first three years to assist with working capital management. 2. Voting rights are attached to the Plan Shares and notices for voting are forwarded to Participants via the trust, pursuant to Clause X of the Trust Deed. 3. Automatic conversion to ordinary shares upon a liquidity event as per Clause X of the AusCo Plan Employee Share Scheme Rules. Operation of the put option When the Plan commenced, it was the intention of ForeignCo (the majority 75% shareholder of AusCo) and the directors of AusCo to use their best efforts to provide liquidity so that the employees’ interests in the AusCo shares could be cashed out via a trade sale or stock exchange listing. It was assumed that had a trade sale or listing occurred, the market value of the Plan Shares would have substantially increased. Therefore, employees would not have been required to have met any performance or vesting conditions and would have been entitled to dispose of their Plan Shares as part of the transaction. If AusCo did not reach a trade sale or stock exchange listing after year three, provided the company had met its performance targets, the Participants could exercise their put options (between year three and year six) such that their Plan Shares would be bought back by ForeignCo. This provided a degree of protection for the employees and a liquidity mechanism in light of the Plan Shares being in a private company and not easily tradable. The performance targets required to be met by AusCo (in order for the Participants to exercise their put options) are outlined in Clause X of the Amended and Restated Shareholders Deed Poll. The Participants could only exercise their put options between year three and six, if the ‘Pay Back Model’ was met. Broadly, the Payback Model required AusCo to earn sufficient profits within the first three to six years to effectively allow ForeignCo to recoup its initial investment in AusCo. If this occurred, the Participants could exercise their put options (subject to Management Committee approval) and the shares would be bought back by ForeignCo at the price stated in Clause X of the Amended and Restated Shareholders Deed Poll (referred to as the ‘payout value’). The price outlined in Clause X determines a payout value upon exercise of the put option equal to a specified multiple. The payout value paid to the Participant is designed to provide a ‘disposal’ value to the Participant in line with the fair market value of the shares at that time. The payout value is calculated by reference to AusCo’s earnings before interest, tax, depreciation and amortisation (EBITDA) after adjusting for certain items in the connection with the Plan and cash bonuses (if paid). Broadly, the payout value is determined by multiplying EBITDA (in the financial year immediately prior to the date of the Exercise Notice) by X times. The Tax Liability Loan is deducted from the payout value. Due to the decline in AusCo’s industry and difficult trading conditions, AusCo did not meet its performance targets between years three and six. Therefore, the Pay Back Model was not met and Participants could not exercise their put options. The next possible exercise date is between the sixth and seventh anniversary of the date AusCo was acquired by ForeignCo. The relevant anniversary dates are 1 April 20FF to 1 April 20GG. No explicit performance targets need to be met by AusCo after the sixth anniversary (i.e. the Pay Back Model does not need to be met) in order for employees to be able to exercise the put option. However, the Management Committee must first agree to the exercise of the put option under Clause X of the Amended and Restated Shareholders Deed Poll. If Participants exercise their put options between the sixth and seventh anniversary (i.e. between 1 April 20FF and 1 April 20GG) the relevant financial years for determining the payout value are 31 December 20EE and 31 December 20FF. Based on preliminary calculations performed to date, it is anticipated that the payout value, will be negative, or significantly less than the value of each Participant’s Tax Liability Loan. Therefore, after the repayment of the Tax Liability Loan Participant’s would not receive any value if they exercised their put option. As such, it is anticipated that Participants will not exercise their put option. If the Participant’s cannot exercise their put options between 1 April 20FF to 1 April 20GG, there is an overriding disposal restriction in Clause X of the Plan Rules that prevents an employee from otherwise disposing of their shares while subject to the Plan Rules. Termination and wind up of the Plan The purpose of the Plan was to align Participants with AusCo’s long term strategic goals (i.e. trade sale or stock exchange listing) and provide Participant’s with a reward represented by the share price growth of AusCo securities. In the event, of a trade sale or stock exchange listing, the Participants would have been provided with liquidity to dispose of their Plan Shares and realise the increased value. If the trade sale, or listing did not occur, the put option and subsequent payout value was designed to capture the increase in value of the Plan Shares. However, due to poor trading conditions the price of AusCo securities as reflected by ongoing trading losses has declined substantially. As such, Participants are likely to obtain a nil payout value (and therefore are unlikely to exercise their put options). The Plan has not achieved what it was designed for and has become an administrative burden and ongoing distraction for Participants who remain employed by AusCo (or its subsidiaries) and AusCo Management. AusCo would like to reduce the ongoing costs it is paying to Trustee Pty Limited and XYZ to assist in the yearly management of the Plan and Trust. In addition, due to trading conditions, AusCo has substantially decreased its overall workforce and as a result, a number of Participants are no longer employed by AusCo. Depending on their individual circumstances those Participants were either deemed good or bad leavers by the Management Committee in accordance with Clause X of the Plan Rules. This has created additional administration for the Management Committee in relation to ongoing correspondence with both good and bad leavers. As a result, the Management Committee is seriously contemplating terminating the Plan. This could potentially occur prior to 1 April 20GG (i.e. the last date available for Participants to exercise their put options), once the financial results are ascertained for the year ended 31 December 20FF. Therefore, it is anticipated that by February or March 20GG (if not earlier) it can be communicated to Participants whether or not there would be a payout value if they exercised their put options. Assuming there is no payout value (and the Participants do not exercise their put options), the subsequent termination of the Plan will result in Participant’s forfeiting their beneficial interests in the AusCo shares currently held by the Trustee. The Management Committee anticipates that the Plan may be terminated in two ways: ● by the Management Committee terminating the Plan under Clause X; or ● alternatively, upon expiration of the Tax Loan Agreement on 31 May 20GG, the Management Committee can take action under the Plan Rules to seek repayment or reduction of the loan. The two alternatives are outlined in further detail below. Termination of the Plan under Clause X The Plan Rules contain a broad discretion for the Management Committee to terminate the Plan in accordance with Clause X which provides that: X Termination or suspension (a) The Management Committee may at any time terminate, suspend or reinstate the operation of the Scheme for such period or periods as it thinks fit, provided that any such termination or suspension does not materially reduce the rights of a Participant (unless agreed by the Participant) in respect of Plan Shares issued to them. (b) If the Scheme is suspended or terminated, the Management Committee will decide how Plan Shares then held for Participants under the Scheme are to be dealt with and, where applicable, must give such directions to any Trustee regarding the operation of the Scheme as the Trustee may request. The Management Committee has indicated that if it decides to terminate the Plan under Clause X, the Participant’s Plan Shares will be forfeited by way of a buy-back (for nominal consideration) under Clause X of the Plan Rules. In accordance with Clause X, the Management Committee may only terminate the Plan if it does not materially reduce the rights of a Participant (unless agreed by the Participant). It is considered by the Management Committee that the termination will not materially reduce the rights of a Participant where: ● the fair market value of the shares is substantially less than the initial Tax Loan Liability and therefore, the Participants are unlikely to receive any value for their Plan Shares even if there was a liquidity event; and ● the Participants can also not dispose of their Plan Shares and realise any value in the foreseeable future due to disposal restrictions in the Plan Rules. However, out of an abundance of caution whilst the Management Committee does not agree that the Participant’s rights have been materially reduced, the Management Committee may nonetheless get Participants to sign a Deed of Termination to protect AusCo and the Management Committee against any future legal claim. Forfeiture of shares due to the expiration of the Tax Loan Liability If the Plan is not terminated under Clause X (as outlined above), the Tax Loan Agreement will expire on 31 May 20GG. Clause X of the Tax Loan Agreement outlines what occurs in these circumstances: a) Subject to Clause X, the Loan becomes due and payable by the Participant on: (i) the Participant Disposing of the Plan Shares; or (ii) on a Liquidity Event, whichever occurs earlier. b) The Participant must repay the entire Loan on before the Expiry Date. c) From the date which is 60 days after the acquisition of the Plan Shares under the Scheme the Participant’s repayment obligation under the Loan shall be the lesser of the following amounts: (i) the Loan less any repayments; and (ii) the Fair Value of the Plan Shares at the time of their Disposal and to which the Loan relates, and where the Fair Value of the Participant’s Plan Shares is less than the outstanding balance of the Loan, the Fair Value of the Plan Shares will be treated as full settlement of the repayment obligation under the Loan. Clause X of the Tax Loan Agreement provides that: Subject always to Clause X, if the Loan becomes due and payable and the Participant has not repaid the amount of the Loan in full; the Management Committee may instruct the Trustee and/or take whatever other action which it considers necessary as provided for in the Rules in order to seek repayment of or reduction in the Loan. The intention of the Tax Loan was that the Participants were not required to pay any amount from their own resources. Therefore, the Tax Loan was structured as a limited recourse loan. It was anticipated that the Tax Loan Liability would be repaid from the proceeds of a liquidity event such as a listing, trade sale or via the Participant’s exercising their put options. If the fair market value of the shares increased above the Tax Loan Liability amount the Participant’s would receive the increase in value upon a liquidity event. Alternatively, if the fair market value decreased below the Tax Loan Liability balance the Participants would not be required to repay that amount but would forfeit their shares in full and final satisfaction of the Tax Loan Liability balance. It was never intended for the Participants to be required to pay any amount from their own resources. Therefore, if the Tax Loan Agreement expires (prior to a liquidity event), the Management Committee may take action such as a buy-back or cancellation of that Participant’s shares in accordance with Clause X of the Plan Rules. As such, the Participants will effectively forfeit their shares. The Participant The Participant acquired Plan Shares under the Plan in the income year ended 30 June 20AA. The Participant included the discount received in their assessable income under Division 83A-B. The Participant was not eligible for tax deferral under Subdivision 83A-C as the conditions under subsection 83A-105(2) were not met because the shares were offered to less than 75% of permanent employees. The Participant would like to understand the tax consequences if the following events occur: ● the Participant ceases employment with AusCo (or its subsidiaries) and becomes a bad leaver as defined in Clause X of the Plan Rules; ● the Participant remains an employee (or becomes a good leaver) and the Plan is terminated under Clause X of the Plan Rules; ● the Participant remains an employee (or becomes a good leaver) and the Plan is terminated under Clause X of the Plan Rules and the Participant is asked to sign a Deed of Termination; ● the Participant remains an employee (or becomes a good leaver) and forfeits their shares after the expiration of the Tax Loan Agreement. The Taxpayer is the relevant taxpayer in this case.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 170(10AA) | Income Tax Assessment Act 1997 Section 83A-310 | Income Tax Assessment Act 1997 Subsection 104-10(4) | Income Tax Assessment Act 1997 Subsection 104-25(3) | Income Tax Assessment Act 1997 Section 130-85 | Income Tax Assessment Act 1997 Subsection 130-85(1) | Income Tax Assessment Act 1997 Paragraph 130-85(1)(a) | Income Tax Assessment Act 1997 Paragraph 130-85(1)(b) | Income Tax Assessment Act 1997 Paragraph 130-85(1)(c) | Income Tax Assessment Act 1997 Subsection 130-85(2) Tax Laws Amendment (2009 Budget Measures No. 2) Bill 2009

Reasons for decision: Summary: All references are to the Income Tax Assessment Act 1997 unless otherwise stated. | Summary: If the Taxpayer makes a choice to cease employment and forfeits their interest in the Plan Shares, they will be entitled to amend their income tax return for the year ended 30 June 20AA, due to the combined operation of section 83A-310 and item 26 in the table in subsection 170(10AA) of the ITAA 1936. | Detailed Reasoning - Detailed reasoning: For grants of ESS interests made prior to 1 July 20DD, section 83A-310 provides that Division 83A (apart from Subdivision 83A-E) is taken never to have applied in relation to an ESS interest acquired by an individual under an ESS if: a) disregarding this section, an amount is included in the individuals assessable income under this Division in relation to the interest; and b) either: i. the individual forfeits the interest; or ii. in the case of an ESS interest that it is a beneficial interest in a right – the individual forfeits or loses the interest without having disposed of the interest or exercised the right; and c) the forfeiture or loss is not the result of: i. a choice made by the individual (other than a choice by that individual to cease particular employment); or ii. a condition of the scheme that has the direct effect of protecting (wholly or partly) the individual against a fall in the market value of the interest. The Explanatory Memorandum to the Tax Laws Amendment (2009 Budget Measures No. 2) Bill 2009 explains that: 1.325 The new law provides for a refund of tax paid in relation to ESS interests in certain circumstances where those interests are forfeited after the employee has been taxed on the discount. 1.326 The refund is only available where the employee had no choice but to forfeit the ESS interest (except when that choice was to cease employment), and where the conditions of the scheme were not constructed to protect the employee from market risk. 1.327 Under such circumstances, the forfeited ESS interest is treated as never having been acquired, and the taxpayer can claim a refund of income tax by requesting that the Commissioner amend their income tax assessment to remove income previously included in their assessable income. 1.328 There is no time limit on amending an assessment to exclude an amount from a taxpayer’s assessable income for a share interest which is forfeited, or for a right which was lost without being exercised. [Schedule 1, item 19, item 30 in the table in subsection 170(10AA) of the ITAA 1936] 1.329 As the refund provisions are not intended to protect the employee from downside market risk, a refund will not be available where the share interest is forfeited due to a choice of the employee (except when that choice was to cease employment). Such a choice may include a choice not to exercise or dispose of an ESS interest or some other choice of the employee that result in the forfeiture of the ESS interest. 1.330 Specifically, the new law is taken never to have applied in relation to an ESS interest (resulting in a refund of any previously paid income tax) where: ● an amount of employee share scheme discount has been, or would be, included in the employee’s assessable income; ● the employee has either forfeited the ESS interest or, in the case of a right, the employee has lost the right without having disposed of or exercised it; and ● the forfeiture or loss is not the result of a choice made by the individual (except when that choice was to cease employment), and nor is it the result of a condition of the scheme that has the direct effect of wholly or partly protecting the employee from a fall in the market value of the ESS interest. | Detailed Reasoning - [Schedule 1, item 1, section 83A-310]: 1.331 Whether or not forfeiture is as a result of a choice of an employee is something to be assessed on a case-by-case basis. 1.332 A choice to leave employment does not result in ineligibility for a refund. This provision recognises that in most cases a decision to leave employment will not primarily be based on the employee share scheme tax consequences of that decision, and that a refund of tax paid over the forfeited ESS interests is appropriate in such cases. 1.333 A situation in which an employee ceases employment primarily to avoid the employee share scheme rules, such as to obtain a refund, only to recommence employment with the same employer shortly after, will likely be subject to the general anti-avoidance rules. 1.334 In situations where a refund is not available under the refund provisions, the taxpayer may be able to claim a capital loss under the CGT provisions. In addition to paragraphs 1.332 and 1.333 of the Explanatory Memorandum above, example 1.47: ESS interest forfeited due a choice of the employee also specifically provides an example where ESS interests are forfeited as a result of an employee’s choice to cease employment. | Detailed Reasoning - Application to your circumstance: You submitted that the Taxpayer acquired Plan Shares under the Plan in the income year ended 30 June 20AA and they included the discount received in their assessable income under Subdivision 83A-B in the same income year. They then subsequently paid the corresponding tax liability arising from the discount received on the Plan Shares. The Taxpayer was assessed upfront as they were not eligible for tax deferral under Subdivision 83A-C. This is because the Plan shares were offered to less than 75% of permanent employees and the conditions under subsection 83A-105(2) were not met. If the Taxpayer makes a choice to cease employment and forfeits their interest in the Plan Shares as a result, they will be able to apply section 83A-310 and amend their income tax return for the year ended 30 June 20AA to remove the discount on the shares previously included in their assessable income for the 20AA income year. There is no time limit on amending an assessment to exclude an amount from a taxpayer's assessable income for a share interest which is forfeited, pursuant to item 26 of subsection 170(10AA) of the ITAA 1936. Such choice to cease employment by an employee must be genuine and not contrived. As addressed in paragraph 1.333, a situation in which an employee ceases employment primarily to avoid the imposition of the employee share scheme provisions so as to obtain a refund, only to recommence employment with the same employer shortly after, will likely be subject to the general anti-avoidance rules. | Summary: If the Taxpayer remains employed (or is a good leaver as defined under Clause X of the Plan Rules) and the Plan is terminated under Clause X of the Plan Rules and the Participant forfeits their interest in the Plan Shares as a result, the Participant will not be entitled to amend their income tax return for the year ended 30 June 20AA, under section 83A-310 and item 26 in the table in subsection 170(10AA) of the ITAA 1936. This outcome remains the same even if the Plan is terminated under Clause X of the Plan Rules (after the Participant signs a Deed of Termination) and the Participant forfeits their interest in the Plan Shares as a result. | Detailed Reasoning - Detailed reasoning: As outlined above in the Question 1, section 83A-310 states that Division 83A (except for Subdivision 83A-E) is taken never to have applied in relation to an ESS interest acquired by an individual under an ESS if: a) disregarding this section, an amount is included in the individuals assessable income under this Division in relation to the interest; and b) either: i. the individual forfeits the interest; or ii. in the case of an ESS interest that it is a beneficial interest in a right – the individual forfeits or loses the interest without having disposed of the interest or exercised the right; and c) the forfeiture or loss is not the result of: i. a choice made by the individual (other than a choice by that individual to cease particular employment); or ii. a condition of the scheme that has the direct effect of protecting (wholly or partly) the individual against a fall in the market value of the interest. The Taxpayer’s ESS interest (i.e. Shares) would be lost or forfeited for the purposes of section 83A-310 when they no longer have the right to the ESS interest under the terms of the Plan Rules. However, subsection 83A-310(c)(i) specifically states that section 83A-310 will not apply where the forfeiture or loss was the result of a choice made by the individual (other than a choice to cease particular employment). | Detailed Reasoning - Application to your circumstances: You submitted that there has been a downturn in the relevant industry since 20BB and as a result AusCo has not met its financial performance targets and has made trading losses for the income years ended 31 December 20BB through to 31 December 20EE. As such, employees did not exercise their put options between years three and six to share their Plan Shares. You also submitted that employees are able to exercise their put options between the sixth and seventh anniversary of the date AusCo was acquired by ForeignCo. The last available date for a Participant to exercise their put option is just before 1 April 20GG. The payout value paid upon exercise of the put option will be calculated by reference to AusCo’s financial results for the year ended 31 December 20FF. The taxpayer anticipates that the financial results for AusCo for the year ended 31 December 20FF, will result in a nil payout value upon exercise of the put option. Any payout value will be below the value of the Tax Loan Liability. As such, the Participants will not receive any amounts if they exercise their put option. Therefore, it is assumed that Participant’s will not exercise their put options. Subject to confirming financial results for 31 December 20FF (and therefore the nil payout value for the put option), the Management Committee intends to terminate the Plan under Clause X of the Plan Rules as it is no longer achieving its objectives. The Plan Rules contain a broad discretion for the Management Committee to terminate the Plan in accordance with Clause X which provides that: | Detailed Reasoning - X. Termination or suspension: (a) The Management Committee may at any time terminate, suspend or reinstate the operation of the Scheme for such period or periods as it thinks fit, provided that any such termination or suspension does not materially reduce the rights of a Participant (unless agreed by the Participant) in respect of Plan Shares issued to them. (b) If the Scheme is suspended or terminated, the Management Committee will decide how Plan Shares then held for Participants under the Scheme are to be dealt with and, where applicable, must give such directions to any Trustee regarding the operation of the Scheme as the Trustee may request. You stated that the Management Committee intends to terminate the Plan under Clause X, and forfeit the Participant’s Plan Shares by way of a buy-back (for nominal consideration) Clause X of the Plan Rules. In accordance with Clause X, the Management Committee may only terminate the Plan if it does not materially reduce the rights of a Participant (unless agreed by the Participant). You submitted that the termination of the Plan will not materially reduce the rights of a Participant because the fair market value of the shares is substantially less than the initial Tax Loan Liability and therefore, the Participants are unlikely to receive any value for their Plan Shares even if there was a liquidity event; and the Participants can also not dispose of their Plan Shares and realise any value in the foreseeable future due to disposal restrictions in the Plan Rules. However, it is the Commissioner’s view that the forfeiture of the Plan Share is the result of the choice made by the individual. According to Clause X of the Plan Rules, a participant will have the following rights attaching to the Plan Shares: ● Dividends; ● Bonus shares; ● Rights to acquire shares; and ● Voting rights Where any employee holds shares, their rights include not only rights to the above but also rights to capital on winding up and general disposition. Notwithstanding that some of these rights may be diminished or restricted during certain periods (such as economic downturn), the underlying rights attached to the shares still persist. It is not true to say that the Participants are unable to dispose and realise any value for their Plan Shares in liquidity events because the fair market value of the shares is substantially less than the initial Tax Loan Liability, or due to the disposal restrictions in the Plan Rules. It is also untrue to say that merely because there is an effective lien against the shares that the only rights are extinguished by the excess of the lien over the current market value. Therefore it is the Commissioner’s view that the termination of the Plan will materially reduce the right of the Participants, and therefore the Management Committee will require the consent and agreement from the Participants, either explicitly or implicitly. On this basis, the Participants must make a choice to agree to the forfeiture of the shares. The Management Committee may ask the Participant to sign a Deed of Termination to acknowledge that a termination of the Plan may materially prejudice their rights, and to ensure that the Management Committee and AusCo are protected against any future claim by the Participants that their rights were materially reduced. In such circumstances, the outcome would remain the same. In other words, it is the Commissioner’s view that the forfeiture of the Plan Share is the result of the choice made by the individual. Hence, the Participant will not be entitled to amend their income tax return for the year ended 30 June 20AA, due to the combined operation of section 83A-310 and item 26 in the table in subsection 170(10AA) of the ITAA 1936. | Summary: If the Participant remains employed (or is a good leaver as defined under Clause X of the Plan Rules) and the Participant’s interest in the Plan Shares is forfeited by the Management Committee after the expiration of the Tax Loan Agreement, the Participant will not be entitled to amend their income tax return for the year ended 30 June 20AA, due to the combined operation of section 83A-310 and item 26 in the table in subsection 170(10AA) of the ITAA 1936 | Detailed Reasoning - Detailed reasoning: You submitted that, the intention of the Tax Loan was that the Participants were not required to pay any amount from their own resources. Therefore, the Tax Loan was structured as a limited recourse loan. It was anticipated that the Tax Loan Liability would be repaid from the proceeds of a liquidity event such as a listing, trade sale or via the Participants exercising their put options. If the fair market value of the shares increased above the Tax Loan Liability amount the Participants would receive the increase in value upon a liquidity event. Alternatively, if the fair market value decreased below the Tax Loan Liability balance the Participants would not be required to repay that amount but would forfeit their shares in full and final satisfaction of the Tax Loan Liability balance. It was never intended for the Participants to be required to pay any amount from their own resources. If the Tax Loan Agreement expires (prior to a liquidity event), the Management Committee can take action under the Plan to seek repayment of the Tax Loan. Due to the limited recourse nature of the loan the Management Committee does not intend to ask Participants to repay the balance. Therefore, the Management Committee will take other actions available to it under the Plan Rules. The Tax Loan Agreement has an expiry date of 31 May 20GG. Clause X of the Tax Loan Agreement provides that: Subject always to Clause X, if the Loan becomes due and payable and the Participant has not repaid the amount of the Loan in full the Management Committee may instruct the Trustee and/or take whatever other action which it considers necessary as provided for in the Rules in order to seek repayment of or reduction in the Loan. [emphasis added] It is anticipated that the Management Committee may take action under the Plan Rules as permitted under Clause X above. It is anticipated that this action could include the Management Committee enforcing a buy-back or cancellation of that Participant’s shares in accordance with Clause X of the Plan Rules. If this occurs, the Participants will be required to hand over their shares in satisfaction of their obligations under the Loan Agreement. | Detailed Reasoning - Application to your circumstances: The term “forfeit” is not defined in the legislation. According to the Macquarie Dictionary, forfeit means ‘to lose, or become liable to lose, in consequence of crime, fault, breach of engagement, etc”. It is considered that where a Participant hands their share back merely in satisfaction of their obligation under the non-recourse loan, this would not constitute a forfeiture for purposes of 83A-310 as the Participant has provided the share to extinguish their liability under the Loan Agreement. The Participant will not be eligible to amend their income tax return in these circumstances due to not meeting the requirements of section 83A-310. | Summary: If the Participant forfeits their shares because the Plan is terminated (in the circumstances outlined in Questions 2 and 3) the Participant will make a capital loss equal to the market value of the shares on the date of grant. | Detailed Reasoning - Detailed reasoning: Once an ESS interest has been taxed under the employee share scheme rules, it is subsequently taxed consistent with other capital assets, most likely under the CGT regime. Where the discount received in relation to an ESS interest is taxed upfront under subdivision 83A-B, the ESS interest is deemed for CGT purposes to have been acquired for its market value at the time it was acquired under section 83A-30. The market value is viewed as the first element of the cost base of the ESS interest for CGT purposes. Any subsequent increase or decrease in the value of the ESS interest in relation to the market value after the taxing point will be accounted for under the CGT provisions. On the subsequent disposal of the shares after the taxing point has occurred, the taxpayer will make a capital gain if the capital proceeds from the disposal of the shares are greater than the market value of the shares on the date they were acquired (assuming no other expenditure has been incurred by the Participant that could form part of the tax cost base of the shares). The taxpayer will make a capital loss on the disposal of the shares if the capital proceeds from the disposal are less than the market value. | Detailed Reasoning - Application to your circumstances: You submitted that the Participant paid income tax under Division 83A upon allocation of shares under the Trust at the confirmed market value. As the AusCo shares were being offered to less than 75% of permanent employees, there was no deferral of the tax payable upon the allocation of shares (refer to section 83A-105(1)(c)). The shares are therefore taken to have been acquired for their market value in accordance with section 83A-30. The market value of the shares at the date of grant would therefore be the Participant’s tax cost base. If the Management Committee terminates the Plan, the Participant will forfeit their beneficial interest in their Plan Share. Under subsection 130-85(1), section 130-85 applies if: a) you acquire an ESS interest under an employee share scheme; and b) Subdivision 83A-B or 83A-C applies to the ESS interest; and c) the ESS interest is, or arises because of, an interest you hold in an employee share trust. The “you” in paragraph 130-85(1)(a) is the Participant in the Plan. For the purposes of this question, as the Trustee acquires shares and allocates them to Participants under the terms of the Trust Deed, each Participant will acquire an “ESS interest” (as defined in subsection 83A-10(1)) under an “employee share scheme” (as defined in subsection 83A-10(2). Paragraph 130-85(1)(a) will be satisfied. Subdivision 83A-B or Subdivision 83A-C will apply to the ESS interest. Paragraph 130-85(1)(b) will be satisfied. The “you” in paragraph 130-85(1)(c) is a Participant in the ESS. On the basis of the assumption that the Trust will be administered in accordance with its terms, the ESS interest will be, or will arise because of, an interest a Participant holds in the Plan Shares, which is an “employee share trust” (as defined in subsection 130-85(4)). The employee will receive their shares under the Plan Rules through the Trust. They will have an interest in the Plan Shares that entitles them to receive a certain number of shares under the ESS. Paragraph 130-85(1)(c) will be satisfied. For these reasons, all of the requirements of subsection 130-85(1) will be satisfied. Therefore, section 130-85 will apply. Under subsection 130-85(2), Division 83A, Part 3-1 and Part 3-3 of the ITAA 1997 apply as if you were absolutely entitled to the relevant share or right: (a) from the time of acquisition of the *ESS interest; and (b) until you no longer have an ESS interest in the share or right. By satisfying paragraph 130-85(1)(a) as described above, a Participant in the Plan will acquire an “ESS interest” (as defined in subsection 83A-10(1)). As a result, subsection 130-85(2) means that, inter alia , Part 3-1 applies as if a Participant was absolutely entitled to the relevant share or right from the time of acquisition of the ESS interest. Part 3-1 includes all of the CGT events. Clause X of the Trust Deed provides that each employee beneficiary is absolutely entitled to the shares that are held on their behalf by the Trustee. On this basis, any disposal of the shares will be treated as a disposal of the shares by the employee and not the Trustee. The disposal of the interest in the Plan Shares by the employee will be a realisation of a capital asset and the disposal proceeds will not constitute income according to ordinary concepts assessable under section 6-5. A capital gains tax event will occur depending on the terms of the forfeiture this might result in CGT event A1 or CGT event C2 occurring. Subsection 104-10(4) in relation to CGT event A1 provides that: You make a capital gain if the capital proceeds from the disposal are more than the asset’s cost base. You make a capital loss if those capital proceeds are less than the asset’s reduced cost base. Subsection 104-25(3) in relation to CGT event C2 provides that: You make a capital gain if the capital proceeds from the ending are more than the asset’s cost base. You make a capital loss if those capital proceeds are less than the asset’s reduced cost base. The Participant will receive no consideration for disposal of their shares and therefore have no capital proceeds from the disposal or ending of the asset. Even if the Participant did receive nominal consideration (e.g. the payment of $XX as defined in Clause X of the Plan Rules) the market value substitution rule would not apply pursuant to paragraph 130-80(4)(b)(i). As outlined above, the tax cost base should equal the market value of the shares at the date of grant (assuming no other expenditure has been incurred by the Participant that could form part of the tax cost base of the shares). As a result, a capital loss should arise equal to the market value of the shares at the date of grant or in the event that nominal consideration is paid the capital loss would be equal to the market value of the shares at the date of grant less the nominal amount paid.

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