ATO Interpretative Decision
ATO ID 2007/66 (Withdrawn)
Income Tax
Employee Share Scheme: rights to acquire shares subject to shareholder approvalFOI status: may be released
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This ATO ID is withdrawn due to repeal of former Division 13A of the Income Tax Assessment Act 1936, the enactment of new Division 83A of the Income Tax Assessment Act 1997 and subsequent to the decision in Davies v. Commissioner of Taxation 2015 ATC 20-520; [2015] FCA 773; (2015) 234 FCR 93. Further guidance on this issue can be found in TD 2016/17 Income tax: in what circumstances does a contractual right, which is subject to the satisfaction of a condition, become a right to acquire a beneficial interest in a share for the purposes of subsection 83A-340(1) of the Income Tax Assessment Act 1997?This document has changed over time. View its history.
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Where an employee negotiates a remuneration package with their corporate employer that includes the provision of a right to acquire a share in the company, and the provision of the right is subject to approval by shareholders at the Annual General Meeting (AGM) of 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 in the company will be acquired by the employee for the purposes of Division 13A of the ITAA 1936, when the provision of a right to acquire a share is approved by shareholders at the AGM of the company.
Facts
At the start of a financial year an employee negotiates a new remuneration package with their corporate employer that includes the provision of rights to acquire shares in the company (the equity component).
The equity component of the package is subject to shareholder approval at the subsequent AGM of the company.
The resolution put to shareholders at the AGM in relation to the equity component states that if shareholder approval is not obtained, the company will need to provide an equivalent form of remuneration to the employee.
The resolution put to shareholders is approved at the AGM.
The employee is not required to provide any consideration for the acquisition of the rights.
Reasons for Decision
An employee will acquire a right under an employee share scheme for the purposes of Division 13A of the ITAA 1936 where that right is:
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- a right for the purposes of Division 13A of the ITAA 1936
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- acquired within the meaning of section 139G of the ITAA 1936
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- acquired in respect of employment (subsection 139C(1) of the ITAA 1936), and
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- acquired for less than market value (subsection 139C(3) of the ITAA 1936).
The expression 'right' as used in Division 13A of the ITAA 1936 is not defined, but as 'right' and 'right to acquire a share' are used interchangeably throughout Division 13A, the Commissioner considers that a right should be taken to mean a 'right to acquire a share'.
In accordance with section 139G of the ITAA 1936, 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.
The remuneration package agreed between the employee and the company created certain rights to remuneration in the employee at the time of the agreement. However, if the resolution put to shareholders at the AGM in relation to the equity component was not approved, that part of the rights to remuneration that related to the equity component, may have been satisfied by a cash payment or some other equivalent form of remuneration.
Therefore, the original remuneration package that included potential rights to acquire shares, did not create a right for the purposes of section 139G of the ITAA 1936 at the time the package was agreed to, as the equity component of the package was subject to shareholder approval at a later time (the AGM).
However, when at that later time, the shareholders approved the equity component of the remuneration package, a right (to acquire a share) was created in the employee for the purposes of section 139G of the ITAA 1936.
As the right to acquire a share is a component of the employee's remuneration package, the right is acquired in respect of employment for the purposes of subsection 139C(1) of the ITAA 1936. Further, as the employee is not required to provide any consideration, the right is acquired for less than market value for the purposes of subsection 139C(3) of the ITAA 1936.
Thus, 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 shareholders at the AGM approved the equity component of the remuneration package.
Date of decision: 29 January 2007Year of income: Year ended 30 June 2007
Legislative References:
Income Tax Assessment Act 1936
Division 13A of Part III
subsection 139C(1)
subsection 139C(3)
section 139G
Keywords
Employee share schemes & options
ISSN: 1445-2782
| Date: | Version: | |
| 29 January 2007 | Original statement | |
| You are here | 19 December 2018 | Archived |