Private ruling: Employee Share Scheme
Date of advice: 18 July 2016
Published: November 2016
Ruling period: Income years ended 30 June 2014, 2015, 2016 and 2017.

Ruling: Q1: Is the taxing point for the rights issued under the employee share scheme (ESS) described deferred until the first time at which the rights may be disposed? | A1: No. The Options are taxed in the income year in which they are granted.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. The Company granted the Taxpayer options (the Options) for nil consideration. The Options are subject to a disposal restriction, after which all the Options, vested and unvested, are transferrable. The Options vest after the above disposal restriction ends.

Relevant legislative provisions: Income Tax Assessment Act 1997 Paragraph 83A-25(1) | Income Tax Assessment Act 1997 Paragraph 83A-35(7) | Income Tax Assessment Act 1997 Section 83A-15 | Income Tax Assessment Act 1997 Subdivision 83A-B | Income Tax Assessment Act 1997 Subdivision 83A-C | Income Tax Assessment Act 1997 Division 83A Summary | The taxing point for the Options is the time at which they were granted as there is no real risk of forfeiture. | Detailed reasoning | All references are to the Income Tax Assessment Act 1997 unless otherwise stated. Division 83A discusses employee share schemes and section 83A-15 relevantly provides that broadly a discount received on interests under an ESS will be included in your assessable income when the interests are received unless there is a real risk of forfeiture, in which case your taxing point may be deferred (see Subdivision 83A-C). | Paragraph 83A-35(7) provides that Subdivision 83A-B applies to an interest if there is no real risk that you will forfeit or lose the ESS interest, other than by disposing of it, exercising it or letting it lapse. | In relation to a real risk of forfeiture, the Explanatory Memorandum to the Tax Laws Amendment (2009 Budget Measures No. 2) Bill 2009 provides: | 1.41 Deferral of taxation is considered the appropriate treatment in situations where there is a real risk that the benefits of shares or rights may never be realised because the ESS interests may be forfeited. | 1.42 An ESS interest is at real risk of forfeiture if a reasonable person would consider that there is a real risk that the employee would lose or forfeit the interest or never receive it, other than by selling or exercising it, by intentionally taking no action to realise the benefit, or through the market value of the ESS interest falling to nil. | 1.43 Providing for deferral of tax in these situations recognises that the employee may never have a chance to realise 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, to align the interests of employees and employers. | In this situation a reasonable person would not consider that there is a real risk that the benefits of the Options may never be realised due to forfeiture as the Options may be sold prior to vesting. The vesting conditions for the exercise of Options can be met at a time before expiry. However, the disposal restrictions end at a time prior to the expiry, after which point they may be disposed of at any time before expiry. Thus, the Options could only lapse and be forfeited where they are not disposed of prior to the expiry date. As such there is no risk that there will never be a chance to dispose of the Options by choice and, thus, no real risk of forfeiture for the purposes of paragraph 83A-35(7). | As at the time of grant there was no real risk of forfeiture, Subdivision 83A-B applies to the Options. Subdivision 83A-B includes the discount received from the granting of ESS interests in the assessable income for the income year in which they were granted, pursuant to paragraph 83A-25(1).


This notice must not be taken to imply anything about: | ● the binding nature of the private advice issued to the applicant | ● the correctness of other edited versions. | Edited versions cannot be relied upon as precedent or used for determining how the ATO will apply the law in other cases.