Private ruling: Issue of options - taxation issues
Published: February 2012
Ruling period: Year ended 30 June 2010 | Year ended 30 June 2011 | Year ending 30 June 2012
Date scheme commenced: 1 July 2009

Ruling: Q1: Does the Company have reporting obligations under Division 392 of Schedule 1 to the Taxation Administration Act 1953 (TAA) in relation to the options issued to the individual? | A1: Yes, for the Tranche 1 options. No, for the Tranche 2 and 3 options. | Q2: Is the Company liable to pay fringe benefits tax (FBT) in relation to the options issued to the individual? | A2: No, for the Tranche 1 options. Yes, for the Tranche 2 and 3 options.

Relevant facts and circumstances: The individual is the Managing Director of the Company. During the year ended 30 June 2010 the individual received director's fees from the Company and provided services to the Company. At a General Meeting of the Company's shareholders in late 2009 the Company obtained the approval of the shareholders to issue the options to the individual. The Company issued the options to the individual in late 2009. The Company issued the options to the individual by way of incentive and as part of his remuneration package. The details of the options are as follows: Tranche 1 · One third of the options. · The exercise price of the options is $0.Xper option. · The vesting date of the options is the General Meeting date. · The expiry date of the options is two years from the vesting date. Tranche 2 · One third of the options. · The exercise price of the options is $0.X per option. · The vesting date of the options is one year from the General Meeting date. · The expiry date of the options is two years from the vesting date. Tranche 3 · One third of the options. · The exercise price of the options is $0.X per option. · The vesting date of the options is two years from the General Meeting date. · The expiry date of the options is two years from the vesting date. The options were issued for nil consideration. Each option entitles the individual to an ordinary share in the Company. The options which have not vested will lapse if the individual resigns from or terminates his position with the Company or if the Board determines that the individual has acted fraudulently, dishonestly or in breach of his obligations to the Company and as a consequence terminates the individual's position with the Company. The options are not quoted on the Australian Stock Exchange. When the individual acquired the Tranche 1 options there was no real risk that he would forfeit or lose them or the shares he will acquire by exercising them. When the Tranche 2 and 3 options vested there was no real risk that the individual would forfeit or lose them and the individual was not restricted from disposing of them. The individual did not exercise or dispose of the Tranche 2 or 3 options within 30 days of the dates they vested. On the issue date of the options the market value of an ordinary share in the Company was $0.X. Under regulation 83A-315.02 of the Income Tax Assessment Regulations 199 7 (ITAR 1997) the value on the issue date of a Tranche 1 option is $0.01 and the value on the issue date of a Tranche 2 and 3 option is nil. An Independent Expert's Report provides that the value of a Tranche 2 option is 0.X cents and the value of a Tranche 3 option is 0.Xcents. Immediately after the individual acquired the options he did not hold a beneficial interest in more than 5% of the shares in the Company and was not in a position to cast or control the casting of more than 5% of the maximum number of votes that might be cast at a general meeting of the Company. The predominant business of the Company is not the acquisition, sale or holding of shares, securities or other investments.

Relevant legislative provisions: Taxation Administration Act 1953 Schedule 1 Division 392 | Income Tax Assessment Act 1997 Division 83A | Income Tax Assessment Regulations 199 7 Regulations 83A-315.01 to 83A-315.09 | Fringe Benefits Tax Assessment Act 1986 Sections 40 and 43 and subsection 136(1)

Reasons for decision: Summary: The Company has reporting obligations under Division 392 of Schedule 1 to the TAA in relation to the Tranche 1 options but does not have any reporting obligations under that Division in relation to the Tranche 2 and 3 options. | Detailed Reasoning - Division 392 of Schedule 1 to the TAA: Division 392 of Schedule 1 to the TAA relates to employee share scheme reporting. Subsection 392-5(1) provides that an entity (the provider) must give a statement to the Commissioner and to an individual for a financial year if: both of the following subparagraphs apply: (i) the provider provides ESS interests to the individual during the year; (ii) Subdivision 83A-B or 83A-C of the Income Tax Assessment Act 1997 (ITAA 1997) applies to the interests; or all of the following subparagraphs apply: (i) the provider has provided ESS interests to the individual (whether during the year or during an earlier year); (ii) Subdivision 83A-C of the ITAA 1997 applies to the interests; (iii) the ESS deferred taxing point for the interests occurs during the year. Subsection 392-10(1) provides that if the provider becomes aware of a material change or material omission in any information given to the individual or the Commissioner under Division 392, the provider must: · tell the individual or the Commissioner of the change in the approved form; or · give the omitted information to the individual or the Commissioner in the approved form. | Detailed Reasoning - Division 83A of the ITAA 1997: Division 83A of the ITAA 1997 relates to the taxation of discounts received and gains made on ESS interests acquired under employee share schemes on or after 1 July 2009. Section 83A-10 provides that: · An ESS interest in a company includes a beneficial interest in a right to acquire a beneficial interest in a share in the company. · An employee share scheme is a scheme under which ESS interests in a company are provided to employees of the company in relation to the employees' employment. Section 83A-325 provides that Division 83A also applies to an individual who receives or is entitled to receive work and income support withholding payments from an entity otherwise than as an employee and to an individual who provides services to an entity otherwise than as an employee. Subdivision 83A-B includes a discount received by a taxpayer on an ESS interest they acquire under an employee share scheme in their assessable income for the financial year in which they acquire the interest. Section 83A-20 provides that Subdivision 83A-B applies to an ESS interest if a taxpayer acquires the interest under an employee share scheme at a discount. Note 1 to section 83A-20 provides that Subdivision 83A-B does not apply if Subdivision 83A-C applies. Subdivision 83A-C includes a gain made by a taxpayer on an ESS interest they acquire under an employee share scheme in their assessable income for the financial year in which the ESS deferred taxing point for the interest occurs. Section 83A-105 provides that Subdivision 83A-C applies and Subdivision 83A-B does not apply to an ESS interest that is a beneficial interest in a right to acquire a beneficial interest in a share if all of the following conditions are satisfied: · Subdivision 83A-B would apart from this section apply to the interest. · When the taxpayer acquires the interest they are employed by the company. · When the taxpayer acquires the interest all the interests available for acquisition under the employee share scheme relate to ordinary shares. · When the taxpayer acquires the interest the predominant business of the company is not the acquisition, sale or holding of shares, securities or other investments. · Immediately after the taxpayer acquires the interest they do not hold a beneficial interest in more than 5% of the shares in the company and are not in a position to cast or control the casting of more than 5% of the maximum number of votes that might be cast at a general meeting of the company. · When the taxpayer acquires the interest there is a real risk that under the conditions of the scheme they will forfeit or lose the interest (other than by disposing of it, exercising the right or letting the right lapse) or forfeit or lose the beneficial interest in the share (other than by disposing of it). Section 83A-120 provides that: The ESS deferred taxing point for an ESS interest that is a beneficial interest in a right to acquire a beneficial interest in a share is the earliest of the following times: The first possible taxing point is the earliest time when: · the taxpayer has not exercised the right; · there is no real risk that, under the conditions of the employee share scheme, the taxpayer will forfeit or lose the interest (other than by disposing of it, exercising the right or letting the right lapse); and · if at the time the taxpayer acquired the interest, the scheme genuinely restricted them from immediately disposing of it - the scheme no longer restricts them. The second possible taxing point is the time when the employment in respect of which the taxpayer acquired the interest ends. The third possible taxing point is the end of the seven year period starting when the taxpayer acquired the interest. The fourth possible taxing point is the earliest time when: there is no real risk that, under the conditions of the employee share scheme, the taxpayer will forfeit or lose the interest (other than by disposing of it, exercising the right or letting the right lapse); · if, at the time the taxpayer acquired the interest, the scheme genuinely restricted them from immediately exercising the right - the scheme no longer restricts them; · there is no real risk that, under the conditions of the scheme, the taxpayer will forfeit or lose the beneficial interest in the share (other than by disposing of it); and · if at the time the taxpayer acquired the interest, the scheme genuinely restricted them from immediately disposing of the beneficial interest in the share - the scheme no longer restricts them. However, the ESS deferred taxing point for the interest is the time the taxpayer disposes of the interest (other than by exercising the right) or the beneficial interest in the share if that time occurs within 30 days after the time worked out above. Section 83A-315 provides that if the regulations specify an amount in relation to an ESS interest, that amount should be used instead of the market value of the interest in working out: · whether there is a discount given in relation to the interest; and · if so - the amount of the discount. Regulations 83A-315.01 to 83A-315.09 of the ITAR 1997 Regulations 83A-315.01 to 83A-315.09 of the ITAR 1997 relate to the determination of the value of an unlisted right for the purposes of Division 83A of the ITAA 1997. Regulation 83A-315.01 provides that: For subsection 83A-315 of the ITAA 1997, the amount, in relation to an unlisted right that must be exercised within 10 years after the day when the beneficial interest in the right was acquired is at the choice of the individual the market value of the right or the amount determined by the application of regulations 83A-315.02 to 83A-315.09. However, if the ESS deferred taxing point for an ESS interest is the day when the individual disposes of the interest (other than by exercising the right) or the beneficial interest in the share, the amount is the market value of the right or share. Regulation 83A-315.02 provides that if a right is not quoted on an approved stock exchange on a particular day, the value of the right is the greater of: · the market value on the day of the share that may be acquired by exercising the right less the lowest amount that must be paid to exercise the right; and · the value determined in accordance with regulations 83A-315.05 to 83A-315.09. | Detailed Reasoning - Work and income support withholding payments: Work and income support withholding payments include payments of remuneration made by an incorporated company to an individual as a director of the company or as a person who performs the duties of a director of the company. Refer to subsection 995-1(1) of the ITAA 1997, subsection 6(1) of the Income Tax Assessment Act 1936 and section 12-40 of Schedule 1 to the TAA. | Detailed Reasoning - Discount: The term 'discount' is not defined in the ITAA 1997. However, paragraph 1.102 of the Explanatory Memorandum to the Tax Laws Amendment (2009 Budget Measures No. 2) Bill 2009 states: The discount is the market value of the ESS interests less any consideration paid or to be paid by the employee. | Detailed Reasoning - Example 1.2: Inclusion of a discount in assessable income: Liz is employed by Pink Boats Inc. She receives Pink Boat shares with a market value of $100,000 for $50,000 of her money under an employee share scheme. This means that she has received a discount of $50,000, which will be included in her assessable income upon her acquisition of the ESS interests. | Detailed Reasoning - Real risk of forfeiture or loss: ATO Interpretative Decision ATO ID 2010/61 provides that when an employee acquires rights under an employee share scheme there is a real risk that under the conditions of the scheme the employee will forfeit or lose the rights if they cease employment before the vesting date of the rights where that date is 12 months or more from the date the rights were granted. | Detailed Reasoning - Application to your circumstances: The Company will have reporting obligations under Division 392 of Schedule 1 to the TAA in relation to the options issued to the individual if they are ESS interests for the purposes of Division 83A of the ITAA 1997 and Subdivision 83A-B or 83A-C of the ITAA 1997 applies to them. The individual acquired the options after 1 July 2009. The options are rights to acquire shares in the Company. The individual was the Managing Director of the Company. He received work and income support withholding payments from the Company as the Managing Director and provided services to the Company as the Managing Director. The Company provided the options to the individual in relation to his appointment as the Managing Director. Hence, the individual acquired the options under an employee share scheme. Therefore, the options are ESS interests for the purposes of Division 83A of the ITAA 1997. Subdivision 83A-B or 83A-C of the ITAA 1997 will apply to the options if they represent ESS interests acquired by the individual under an employee share scheme at a discount. As indicated above, the options represent ESS interests acquired by the individual under an employee share scheme. The discount received on an option is the market value of the option at the acquisition date less the acquisition cost of the option. All the options are unlisted and must be exercised within 10 years after the day they were acquired by the individual. The Tranche 1 options do not have an ESS deferred taxing point as the last condition in section 83A-105 of the ITAA 1997 does not apply to them. This is because when the individual acquired the options there was no real risk that he would forfeit or lose them or the shares he will acquire by exercising them. The Tranche 2 and 3 options have an ESS deferred taxing point as the last condition in section 83A-105 of the ITAA 1997 applies to them. This is because when the individual acquired the options there was a real risk that he would forfeit or lose them before the dates they vested which were 12 months or more from the date they were granted. ATO ID 2010/61 supports this view. The ESS deferred taxing points for the options are the dates on which they vested. This is because on these dates the individual had not exercised the options, there was no longer a real risk that he would forfeit or lose them, he was not restricted from disposing of them and he did not exercise or dispose of them within 30 days of the dates they vested. Hence, for all the options the individual is entitled to use their value under regulation 83A-315.02 of the ITAR 1997 instead of their market value to work out the discount received on them. The individual has chosen to do this. The value of a Tranche 1 option is $0.01 and the value of a Tranche 2 and 3 option is nil. The acquisition cost of all the options is nil. Hence, the discount received on a Tranche 1 option is $0.01 and the discount received on a Tranche 2 and 3 option is nil. Therefore, Subdivision 83A-B of the ITAA 1997 applies to the Tranche 1 options and Subdivision 83A-C of the ITAA 1997 does not apply to the Tranche 2 and 3 options as Subdivision 83A-B of the ITAA 1997 would not apart from section 83A-105 of the ITAA 1997 apply to them. This means that the Company has reporting obligations under Division 392 of Schedule 1 to the TAA in relation to the Tranche 1 options but does not have any reporting obligations under that Division in relation to the Tranche 2 and 3 options. | Summary: The Company is not liable to pay FBT in relation to the Tranche 1 options but is liable to pay FBT in relation to the Tranche 2 and 3 options. | Detailed Reasoning - Detailed reasoning: An employer is liable to pay FBT on a fringe benefit they provide to an employee if the benefit has a taxable value. Section 136 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) provides that: · The term 'fringe benefit' means a benefit provided by an employer to an employee in respect of the employment of the employee but does not include a benefit constituted by the acquisition of an ESS interest under an employee share scheme (within the meaning of the ITAA 1997) to which Subdivision 83A-B or 83A-C of that Act applies. · The term 'employer' includes a current employer. · The term 'current employer' means a person who pays or is liable to pay salary or wages. · The term 'employee' includes a current employee. · The term 'current employee' means a person who receives or is entitled to receive salary or wages. · The term 'salary or wages' includes a payment from which an amount must be withheld under section 12-40 of Schedule 1 to the TAA. Section 12-40 relates to payments to company directors. · The term 'employment' in relation to a person, means the holding of any office or appointment, the performance of any functions or duties, the engaging in of any work, or the doing of any acts or things that results, will result or has resulted in the person being treated as an employee. · An 'external property fringe benefit' means a property fringe benefit other than an in-house property fringe benefit. · An 'in-house property fringe benefit' means a property fringe benefit in respect of tangible property. · A 'property fringe benefit' means a fringe benefit that is a property benefit. · The term 'property benefit' means a benefit referred to in section 40. · The term 'property' means intangible property and tangible property. · The term 'intangible property' means: · real property; · a chose in action; and · any other kind of property other than tangible property; · but does not include: · a right arising under a contract of insurance; or · a lease or licence in respect of real property or tangible property. · The term 'tangible property' means goods. · The term 'notional value' in relation to the provision of property to a person means the amount that the person could reasonably be expected to have been required to pay to obtain the property from the provider under an arm's length transaction. The term 'recipients contribution' in relation to a property fringe benefit means the amount of any consideration paid to the provider or to the employer by the recipient or by the employee in respect of the provision of the property reduced by the amount of any reimbursement paid to the recipient in respect of that consideration. Section 40 of the FBTAA provides that where, at a particular time, a person (the provider) provides property to another person (the recipient), the provision of the property shall be taken to constitute a benefit provided by the provider to the recipient at that time. Section 43 of the FBTAA provides that the taxable value of an external property fringe benefit is: · where the provider was the employer and the recipient's property was purchased by the provider under an arm's length transaction at or about the provision time - the cost price of the recipient's property to the provider; · where the provider was not the employer and the employer incurred expenditure to the provider under an arm's length transaction in respect of the provision of the property - the amount of that expenditure; or · in any other case - the notional value of the recipient's property at the provision time; · reduced by the amount of the recipients contribution. Taxation Determination TD 93/231 provides the Commissioner's view on what is an acceptable method for determining the notional value of a property fringe benefit for the purpose of sections 42 and 43 of the FBTAA. Paragraphs 1 to 3 of TD 93/231 state: 1. 'Notional value' is defined in subsection 136(1) as the amount that a person could reasonably be expected to have been required to pay to obtain the property under an arm's length transaction. 2. To ascertain the 'notional value' of a property fringe benefit the employer must determine the amount the employee would have to pay for a comparable (on the basis of age, type and condition) benefit under an arm's length transaction. 3. This Office will accept a number of ways of obtaining the notional value including: · the price of comparable goods advertised in local newspapers and/or relevant magazines or similar publications; · the price paid for comparable goods at a public auction; · the price of comparable goods at a second-hand store; or · the market value of the goods determined by a qualified valuer. | Detailed Reasoning - Application to your circumstances: The Company will be liable to pay FBT in relation to the options if they constitute a fringe benefit that has a taxable value. The options are potentially of value and hence constitute a benefit to the individual. The individual was the Managing Director of the Company. The Company paid director's fees to the individual. The individual received director's fees from the Company. The director's fees constitute salary or wages. The Company issued the options to the individual to remunerate him for the services he has rendered / will render to the Company. Hence, the Company was the employer of the individual and the individual was an employee of the Company and the options were issued in respect of the employment of the individual. Therefore, the options constitute a benefit provided by an employer to an employee in respect of the employment of the employee. The Tranche 1 options constitute an ESS interest acquired under an employee share scheme within the meaning of the ITAA 1997 and Subdivision 83A-B of the ITAA 1997 applies to them. Hence, they do not constitute a fringe benefit. The Tranche 2 and 3 options constitute an ESS interest acquired under an employee share scheme within the meaning of the ITAA 1997 but neither Subdivision 83A-B nor Subdivision 83A-C of the ITAA 1997 apply to them. Hence, they constitute a fringe benefit. The Tranche 2 and 3 options constitute a fringe benefit. The options constitute a property benefit as they are property provided by the Company to the individual. Hence, the options constitute a property fringe benefit. The options represent intangible property. Therefore, the options constitute an external property fringe benefit. The provider of the options was the employer of the individual. The options were not purchased by the provider. Hence, under section 43 of the FBTAA the taxable value of the options is their notional value at the time they were provided. TD 93/231 indicates that for the purposes of section 43 of the FBTAA the notional value of property can be the market value of the property as determined by a qualified valuer. An Independent Expert's Report provides that the value of a Tranche 2 option is 0.627 cents and the value of a Tranche 3 option is 0.506 cents. The recipients contribution in relation to the options is nil as the individual did not pay any consideration to acquire them. We consider that the above values represent the notional values and hence the taxable values of the Tranche 2 and 3 options for FBT purposes. The Tranche 2 and 3 options constitute fringe benefits that have a taxable value. Therefore, the Company is liable to pay FBT in relation to them.

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