Employee share scheme: replacement rights received on company takeover

Where rights acquired by an employee under an employee share scheme are replaced by rights to acquire shares in a new company in connection with a 100% takeover by that company, will the new rights, which have substantially different attributes, be regarded as matching rights in the original employer company, for the purposes of section 83A-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. The rights to acquire shares in the new company acquired by the employee in connection with a 100% takeover by that company as a replacement for rights to acquire shares in the original employer company will not be regarded as matching rights in the original company for the purposes of section 83A-130 of the ITAA 1997, because the new rights have substantially different attributes.

The employee was granted rights to acquire shares in their employer company under an employee share scheme to which Division 83A of the ITAA 1997 applies.

The attributes of the rights included an exercise period and an exercise price and the vesting of the rights was subject to performance conditions being satisfied by the company.

In a later year (before the rights were exercised), a company (the new company) effected a 100% takeover of the original employer company (the old company), within the meaning of sections 975-505 and 995-1 of the ITAA 1997.

After the takeover, the employee was employed by the new company.

As a consequence of the takeover, the employee's rights in the old company were replaced by rights to acquire shares in the new company.

The attributes of the new rights are such that, providing the employee remains employed by the new company until the vesting date, the rights will be automatically converted into fully paid ordinary shares in the new company at that time.

Section 83A-130 of the ITAA 1997 ensures that employees are not adversely affected by takeovers and restructures, by allowing taxpayers who have deferred tax under an employee share scheme to roll-over an employee share scheme deferred taxing point that would otherwise occur due to a corporate restructure [1] . Where section 83A-130 of the ITAA 1997 applies, ESS interests [2] acquired by an employee in a new company are treated as if they are a continuation of ESS interests acquired by the employee in the old company.

To treat the acquisition of rights acquired as a consequence of a takeover or restructure resulting in an old company being a 100% subsidiary as a continuation of ESS interests acquired by the employee in the old company, subsection 83A-130(2) requires that: (a) As a result of the arrangement or change, you stop holding the old interests; and (b) The new interests can reasonably be regarded as matching any of the old interests.

The EM provides guidance as to factors that are considered relevant in determining the extent that ESS interests in a new company can reasonably be regarded as matching ESS interests in an old company.

In order to be regarded as reasonably matching, paragraph 1.255 of the EM states that the attributes of the shares or rights immediately before the restructure need to be the same, or substantially the same, immediately after the restructure.

To determine whether the rights granted to the employee as a consequence of the old company becoming a 100% subsidiary of the new company are matching rights for the purposes of section 83A-130 of the ITAA 1997, it is therefore appropriate to compare the relative attributes of the rights acquired by the employee before and after the takeover.

The attributes of the rights to acquire shares in the old company included a specified exercise period and an exercise price and vesting of the rights was subject to performance conditions being satisfied.

By contrast, the attributes of the rights to acquire shares in the new company acquired after the takeover, are such that these rights will be automatically converted into shares in the new company at the vesting date, subject to continuing employment by the employee.

Having regard to the relative attributes of the old and new rights, it is considered that the attributes of the rights in the old company are substantially different to the attributes of the rights in the new company such that it is not reasonable to regard them as matching rights for the purposes of section 83A-130 of the ITAA 1997.

Therefore, the new rights will not be treated as if they are a continuation of the rights acquired by the employee in the old company, for the purposes of the application of Division 83 of the ITAA 1997.

Date of Amendment Part Comment 12 January 2018 All Changed reference from subpara 139DQ(1)(a)(ii) and Division 13A of the ITAA 1936 to Division 83A and section 83A-130 of the ITAA 1997 Reasons for Decision Changed reference from Explanatory Memorandum to the Tax Laws Amendment (2004 Measures No. 7) Bill 2004 to the Explanatory Memorandum to the Tax Laws Amendment (2009 Budget Measures No.2) Bill 2009 Reasons for Decision Changed wording to accord with the Explanatory Memorandum to the Tax Laws Amendment (2009 Budget Measures No.2) Bill 2009

Date of Amendment | Part | Comment

12 January 2018 | All | Changed reference from subpara 139DQ(1)(a)(ii) and Division 13A of the ITAA 1936 to Division 83A and section 83A-130 of the ITAA 1997

Reasons for Decision | Changed reference from Explanatory Memorandum to the Tax Laws Amendment (2004 Measures No. 7) Bill 2004 to the Explanatory Memorandum to the Tax Laws Amendment (2009 Budget Measures No.2) Bill 2009

Reasons for Decision | Changed wording to accord with the Explanatory Memorandum to the Tax Laws Amendment (2009 Budget Measures No.2) Bill 2009