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Where a taxpayer acquires an option under an employee share scheme (ESS), and prior to exercising the option and acquiring a share, the taxpayer gives a voluntary undertaking to their employer to not dispose of the share and no mechanism is put in place to prevent them disposing of the share, will the voluntary undertaking constitute 'a restriction preventing the taxpayer from disposing of a share' for the purposes of paragraph 139CB(1)(c) of the Income Tax Assessment Act 1936 (ITAA 1936)?

No. A voluntary undertaking not to dispose of the share without a mechanism to prevent the disposal, will not constitute 'a restriction preventing the taxpayer from disposing of a share' for the purposes of paragraph 139CB(1)(c) of the ITAA 1936.

A taxpayer is granted an option to acquire a share under an ESS.

The option is a qualifying right for the purposes of Division 13A of Part III (Division 13A) of the ITAA 1936.

Before the option is exercised the taxpayer advises their employer in writing that they voluntarily undertake to not dispose of any share acquired on exercise of the option before the earlier of a number of specified events.

The option is exercised and the taxpayer acquires a share.

On acquisition of the share, there is no mechanism in place to prevent the disposal of the share.

The expression 'a restriction preventing the taxpayer from disposing of a share' used in paragraph 139CB(1)(c) of Division 13A of the ITAA 1936 is not defined. Therefore it should take on its ordinary meaning having regard to its context and the underlying purpose or object of Division 13A.

The Commissioner considers 'a restriction preventing a taxpayer from disposing of a share' to ordinarily be a restriction applied by the taxpayer's employer or an agent or associate of the employer, that prevents the taxpayer from disposing of the share.

Such a restriction will generally arise under the terms of a formal ESS or under the terms of an employment contract and the mechanism for effecting the restriction may include a holding lock on the share put in place by a share registry, or the holding of the share by a trustee.

Therefore, where a taxpayer advises their employer that they will not dispose of any share acquired on exercise of an option, and no mechanism is put in place by the employer, or an agent or associate of the employer to prevent the taxpayer from disposing of the share, the Commissioner does not accept that the voluntarily undertaking by itself, will constitute 'a restriction preventing the taxpayer from disposing of a share' for the purposes of paragraph 139CB(1)(c) of the ITAA 1936.