1 Does section 83A-120 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to the ESS Rights you received such that the deferred taxing points occurred for the Rights on the dates they vested and became exercisable?
1 Yes. Question 2 Does your assessable income for the ruling year include the employee share scheme (ESS discount calculated at the deferred taxing points for the Rights in accordance with section 83A-110 of the ITAA 1997? Answer 2 Yes. This ruling applies for the following period : Year ended 30 June 20xx The scheme commenced on: 1 July 20xx
You were employed as an employee of a company during the ruling period. Your remuneration package included ESS Rights provided in accordance with the company's share rights plan (the Plan). The granting of your ESS Rights is included in your Enterprise Services Agreement (ESA). Your ESA provides ESS Rights which vest when performance conditions are met, or when a change of control event occurs. A clause in the Plan states that it is a tax deferred plan under Subdivision 83A-C of the Income Tax Assessment Act 1997 . There are no clauses in the Plan which prevent you from exercising the rights to acquire the underlying shares, nor are there restrictions on disposals of the acquired shares. In the ruling year the following ESS Rights vested in accordance with your ESA: • XX Rights, vested on Date 1 upon meeting performance vesting conditions, • XX Rights vested on Date 2 upon meeting the Change of Control vesting condition. All of the Rights were exercised and converted into shares on the respective vesting dates. You did not dispose of any of the shares issued under the plan in the ruling year.
You remained employed by the Company for a further six months after vesting of the listed Rights.
Income Tax Assessment Act 1997 Division 83A Income Tax Assessment Act 1997 Subdivision 83A-B Income Tax Assessment Act 1997 Subdivision 83A-C Income Tax Assessment Act 1997 section 83A-10 Income Tax Assessment Act 1997 section 83A-20 Income Tax Assessment Act 1997 section 83A-25 Income Tax Assessment Act 1997 section 83A-33 Income Tax Assessment Act 1997 section 83A-45 Income Tax Assessment Act 1997 section 83A-105 Income Tax Assessment Act 1997 section 83A-110 Income Tax Assessment Act 1997 section 83A-305 Income Tax Assessment Act 1997 section 83A-315
Summary You received ESS Rights from your employer under a deferred taxation ESS to which Subdivision 83A-C applies. As such, the deferred taxing points for the Rights occurred in the ruling year on the dates they vested and were exercisable in accordance with section 83A-120 of the Income Tax Assessment Act 1997 (ITAA 1997). Detailed reasoning Employee share schemes Division 83A applies where an employee receives an ESS interest under an employee share scheme (ESS) at a discount under section 83A-20 of the ITAA 1997. In summary, the ESS provisions recognise the dual nature of grants of shares and rights to acquire shares (options), defined as ESS interests, as both remuneration and investments. To this end, the ESS provisions provide a mechanism for recognising an appropriate value for remuneration purposes and an adjustment to the purchase price for investment purposes to reflect the amount treated as remuneration.
The default position under Division 83A of the ITAA 1997 is that an employee who acquires an ESS interest is taxed upfront on any discount to market value of the ESS interest under subsection 83A-20(1) of the ITAA 1997. Under a taxed upfront ESS, the discount is included in the taxpayer's assessable income in the income year in which the ESS interest is acquired under subsection 83A-25(1) of the ITAA 1997. However, Subdivision 83A-C of the ITAA 1997 for deferred taxation will apply to an ESS interest if the following requirements contained in subsection 83A-105(1) of the ITAA 1997 are satisfied: • Upfront taxation under Subdivision 83A-B of the ITAA 1997 would otherwise apply to the ESS interest. • After applying the market value test in section 83A-315 of the ITAA 1997, there is still a discount in relation to the interest. • The start-up concession in section 83A-33 of the ITAA 1997 does not reduce the taxpayer's assessable income for the interest in ESS interests acquired after 1 July 2015 For ESS interests acquired from 1 July 2015, the further conditions in section 83A-45 of the ITAA 1997 are met:
• Subsection 83A-45(1) of the ITAA 1997 - When you acquire the ESS interest you are employed by a company or a subsidiary of the company • Subsection 83A-45(2) of the ITAA 1997 - The ESS relates only to ordinary shares • Subsection 83A-45(3) of the ITAA 1997 - There is no breach of the integrity rule preventing the ESS interest being in certain share trading and investment companies, together with some other requirements; and • Subsection 83A-45(6) of the ITAA 1997 - The employee/taxpayer does not hold more than 10% of the shares in the issuing company or cannot control more than 10% of the votes in that company at a general meeting. • If the ESS interest is a beneficial interest in a share, the taxpayer and the ESS meet the conditions in paragraph 83A-105(5)(2) of the ITAA 1997; and
• If the ESS interest If the ESS interest is a beneficial interest in a right, from 1 July 2015 this condition will be satisfied if at the time the employee acquired their beneficial interest in rights, the ESS genuinely restricted them from immediately disposing of the rights in accordance with subsection 83A-105(6) of the ITAA 1997. The ESS's rules must also expressly state that Subdivision 83A-C applies to the scheme. Deferred taxing point for rights to acquire shares When tax on the acquisition of an ESS interest is deferred, it is delayed and the ESS discount is not taxed until when the earliest taxing point occurs, referred to as the deferred taxing point. Ordinarily, the deferred taxing point for rights to acquire shares (options) granted on or after 1 July 2015 will be the earliest of the times in accordance with subsections 83A-120(4), (6) and (7) of the ITAA 1997, summarised as follows: • when the ESS interest has not been exercised, there is no real risk of forfeiting the ESS interest, and the scheme no longer genuinely restricts disposal of the ESS interest (subsection 83A-120(4) of the ITAA 1997); or
• the end of the 15-year period starting when the employee acquired the ESS interest (subsection 83A-120(6) of the ITAA 1997); or • when the ESS interest is exercised and there is no real risk of forfeiting the share and the scheme no longer genuinely restricts disposal of the share (subsection 83A-120(7) of the ITAA 1997). For the purposes of Division 83A of the ITAA 1997, the term 'genuinely restricted' is not defined, therefore takes on its ordinary meaning. The term is explained in Taxation Determination 2022/4 Income tax: when are you genuinely restricted from immediately disposing of an interest provided under an employee share scheme? (TD 2022/4). TD 2022/4 sets out the Commissioner's view for working out when a scheme's disposal restrictions were genuine disposal restrictions and when the taxpayer would no longer be 'genuinely restricted' by the scheme for the purposes of determining the deferred taxing point.
Paragraph 21 of TD 2022/4 states that in order for a genuine disposal restriction to occur, the scheme's restriction must control or limit the power or right to (voluntarily or compulsorily) sell, transfer, assign, deal with, make over or part with the ESS interest (whether legally or beneficially). Paragraphs 28 to 30 of TD 2022/4 further state that a scheme's genuine disposal restrictions may operate for either a fixed or variable periods of time. The period of time can be determined by many ways, including the vesting conditions, internal share trading policies, insider trading prohibitions or by any other means listed under the Corporations Act 2001 (Cth). The genuine disposal restrictions will no longer be restrictive at the commencement of the first date of which there is an opportunity to dispose of the ESS interest by way of sale, transfer or gift even if they are lifted only temporarily. The 30-day rule
The deferred taxing point is adjusted to the disposal date of the shares acquired by exercising the rights (the resulting shares) if that disposal occurs within 30 days of the times mentioned above, such as the exercise date. This is known as the 30-day rule under subsection 83A-120(3) of the ITAA 1997 where the time of disposal becomes the deferred taxing point. Application to your circumstances You received ESS interests under your Employer's ESS Plan, which is a tax deferred ESS to which Subdivision 83A-C of the ITAA 1997 applies. Therefore, the deferred taxing points for the Rights are the earliest of the times listed in section 83A-120 of the ITAA 1997. There were no genuine restrictions preventing you from exercising the Rights or disposing of the shares after the Rights vested, and you exercised the Rights and received the shares on the dates the Rights vested. You did not dispose of the shares within 30 days of the date the Rights vested and were exercised. Therefore, the taxing points for the Rights you received under the Plan are the dates that the Rights vested. Question 2 Summary
Your assessable income for the ruling year will include the ESS discount for the Rights, calculated as the market value of the shares at the deferred taxing points for the Rights. Detailed reasoning Where a deferred taxing point occurs in an income year for rights held by an employee's ESS interest under Subdivision 83A-C of the ITAA 1997, section 83A-110 of the ITAA 1997 provides that the employee's assessable income for that income year includes the discount for the ESS interest, calculated as the market value of the ESS interest at the deferred taxing point reduced by the cost base of the interest. For an ESS interest which is a right to acquire a beneficial interest in a share, the market value of the right at the ESS deferred taxing point is the market value of the share. Application to your circumstances
The deferred taxing points for your Rights occurred on the dates they vested and became exercisable, giving rise to an ESS discount which is included in your assessable income for the income year the deferred taxing points occurred. You incurred no expense to acquire the Rights; therefore, your assessable ESS discount for the ruling year is calculated as the market value of the shares at the deferred taxing points of the Rights.