Issue
Where shareholders at the Annual General Meeting (AGM) of a company authorise the company to grant in the future, to an employee, a right to acquire a share in the company, when is the right acquired by the employee for the purposes of Division 13A of Part III (Division 13A) of the Income Tax Assessment Act 1936 (ITAA 1936)?
Decision
A right to acquire a share will be acquired by the employee for the purposes of Division 13A of the ITAA 1936, when following authorisation by shareholders at the AGM, the company enters into a contract with the employee to grant a right to acquire a share in the company.
Facts
An employee is an executive of a public company.
A resolution is put to shareholders at the AGM to authorise the company to grant rights to acquire shares in the company to the employee.
The resolution put to shareholders is approved at the AGM.
The company subsequently entered into a contract with the employee to grant the employee rights to acquire shares in the company.
The rights to acquire shares are rights acquired under an employee share scheme for the purposes of Division 13A of the ITAA 1936.
Reasons for Decision
Section 139G of the ITAA 1936 provides that an employee acquires a right for the purposes of Division 13A of the ITAA 1936 in various circumstances including the time when another person creates a right (being a right to acquire a share) in the employee.
When the shareholders at the AGM approved the resolution to allow the company at some time in the future, to grant rights to acquire shares in the company to the employee, no contractual obligations were created between the company and the employee at that time. Therefore, the resolution did not create a right in the employee within the meaning of section 139G of the ITAA 1936.
However, when the company subsequently entered into a contract with the employee to grant rights to acquire shares in the company, a right (to acquire a share) was created in the employee within the meaning of section 139G of the ITAA 1936.
Therefore, a right to acquire a share was acquired by the employee under an employee share scheme for the purposes of Division 13A of the ITAA 1936 when the company entered into a contract with the employee to grant a right to acquire a share in the company.