Issue
Will the provision of options to an employee under an employee share scheme be excluded from being a 'fringe benefit' by paragraph (h) of the definition of 'fringe benefit' in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA), where the market value of the options for the purposes of Division 83A of the Income Tax Assessment Act 1997 (ITAA 1997) is nil?
Decision
No. The provision of options to an employee in these circumstances is not excluded from being a fringe benefit by paragraph (h) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA.
Facts
An Australian listed public company issued unlisted options to its employee after 1 July 2009 as part of its remuneration strategy.
The options entitled the employee to acquire shares in the company. The employee did not pay any consideration to acquire the options.
The exercise price of the options was known at the time of acquisition and it was not nil.
The options were 'out of the money' at the date of acquisition as the exercise price was more than the current market price of a share in the company at that date.
The exercise period for the options was less than ten years after acquisition.
The options provided to the employee are ESS interests for the purposes of paragraph 83A-10(1)(b) of the ITAA 1997.
The options were acquired under an employee share scheme for the purposes of subsection 83A-10(2) of the ITAA 1997 (that is a scheme in which ESS interests in the company are provided to employees of the company in relation to the employee's employment).
The employee chose to determine the value of the options by applying regulations 83A-315.02 to 83A-315.09 of the Income Tax Assessment Regulations 1997 (ITAR 1997). Under this method the value of the options was determined to be nil.
The options are a benefit provided in respect of the employment of the employee for the purposes of the FBTAA.
Reasons for Decision
Where an employer provides an employee with a benefit that is provided in respect of the employment of the employee, the benefit will be a fringe benefit unless it is specifically excluded from being a fringe benefit under paragraphs (f) to (s) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA.
Paragraph (h) of the definition of fringe benefit in subsection 136(1) of the FBTAA does not include as a fringe benefit a benefit constituted by the acquisition of an ESS interest to which either Subdivision 83A-B or Subdivision 83A-C of the ITAA 1997 applies.
From sections 83A-20 and 83A-105 of the ITAA 1997 it is ascertained that Subdivision 83A-B or 83A-C of the ITAA 1997 cannot apply to an ESS interest acquired under an employee share scheme on or after 1 July 2009 unless that interest is acquired at a discount.
The term 'discount' is not defined for the purposes of Division 83A of the ITAA 1997. However, the Explanatory Memorandum to the Tax Laws Amendment (2009 Budget Measures No. 2) Act 2009 states at paragraph 1.102 that the term 'discount' is: ... the market value of the ESS interest less any consideration paid, or to be paid, by the employee.
Section 83A-315 of the ITAA 1997 provides that, for the purposes of Division 83A of the ITAA 1997, the market value of an ESS interest that is a right, is the amount specified in the regulations.
Where the right is an unlisted right that must be exercised within ten years of acquisition; and the exercise price of the right is known at the time of acquisition and it is not nil, regulation 83A-315.01 of the ITAR 1997 allows an individual to choose to determine the market value of the right at the time of acquisition by applying regulations 83A-315.02 to 83A-315.09 of the ITAR 1997.
The Commissioner accepts, for the purposes of Division 83A of the ITAA 1997, that the options acquired by the employee have a market value of nil at the time of acquisition as: • the options are unlisted; • the options had to be exercised within ten years of acquisition; • the options had a known exercise price at the time of acquisition that was not nil; • the employee elected to determine the value of the options at the time of acquisition by applying regulations 83A-315.02 to 83A-315.09 of the ITAR 1997; and • the value of the options determined by using the regulations was nil.
As the consideration for the acquisition of the options (that is nil) is equal to, or more than, the market value of the option on acquisition, the options were not acquired at a discount.
As the options were not acquired by the employee at a discount, it follows that neither Subdivisions 83A-B nor 83A-C of the ITAA 1997 can apply. Thus the options acquired by the employee are not excluded from being fringe benefits under paragraph (h) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA.