Taxation Determination

TD 2014/21

Income tax: where a right to acquire a beneficial interest in a share is granted subject to shareholder approval, is the right an 'indeterminate right' within the meaning of subsection 83A-340(1) of the Income Tax Assessment Act 1997?

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Preamble

Ruling

1. No. Where a right to acquire a beneficial interest in a share is granted subject to shareholder approval and the employee acquires only a right to have the matter put to the shareholders and nothing more, that right is not an 'indeterminate right' within the meaning of subsection 83A-340(1) of the Income Tax Assessment Act 1997 (ITAA 1997).

2. For the avoidance of doubt, prior to shareholder approval being given, such a right is not an ESS interest within the meaning of subsection 83A-10(1) of the ITAA 1997, as it is not yet a right to acquire a beneficial interest in a share.

3. This ruling also applies for the purposes of section 83A-15 of the Income Tax (Transitional Provisions) Act 1997 (ITTPA).

Date of effect

4. This Determination applies to years of income commencing both before and after its date of issue. However, this Determination will not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of issue of this Determination (see paragraphs 75 and 76 of Taxation Ruling TR 2006/10).

Commissioner of Taxation
3 December 2014

Appendix 1 - Explanation

5. An indeterminate right under subsection 83A-340(1) of the ITAA 1997 is a right an employee acquires that later becomes a right to acquire a beneficial interest in a share. Subsection 83A-340(1) of ITAA 1997 includes two examples:

Example 1:

You acquire a right to acquire, at a future time:

(a)

shares with a specified value, rather than a specified number of shares; or

(b)

an indeterminate number of shares.

Example 2:

You acquire a right under which the provider must provide you with either ESS interests or cash, whichever the provider chooses.

6. Subsection 83A-340(2) of the ITAA 1997 provides that Division 83A of the ITAA 1997 applies to such a right 'as if the right had always been a right to acquire a beneficial interest in a share'.

7. In the examples in subsection 83A-340(1) of the ITAA 1997, the original right is a right to receive property but the precise extent or nature of that property is yet to be determined at the time the original right is acquired. Such a right is capable of becoming a right to acquire a beneficial interest in a share because inherent in it is the capacity to acquire property. It remains to be determined whether the right ultimately becomes a right to acquire a specific number of shares or some other form of property, such as cash.

8. For a right to be an indeterminate right it must be appropriate for Division 83A of the ITAA 1997 to apply to it at the time it was granted. Difficulty in determining how a right might be valued may indicate that it is not a right to which Division 83A of the ITAA 1997 applies and therefore is not an indeterminate right. In FC of T v. McWilliam [2012] FCAFC 105; (2012) 204 FCR 478; 2012 ATC 20-339; (2012) 89 ATR 845 the Full Federal Court implies at paragraph [84] that the ability to value a right pointed to whether it was a right to acquire a share for the purposes of former Division 13A of Part III of the Income Tax Assessment Act 1936 (Division 13A of the ITAA 1936). Given the similarity in the structure and objects of Division 83A of the ITAA 1997 and former Division 13A of the ITAA 1936, the same conclusion can be applied also to Division 83A.

9. A right to acquire the beneficial interest in a share granted subject to shareholder approval is not a right to receive property where, in the absence of approval, the employee is not entitled to receive any benefit. For example, in Fowler v. FC of T [2012] FCA 1040; 2012 ATC 20-351 (a decision in relation to Division 13A of the ITAA 1936), Kenny J held at first instance that it was open to the shareholders to deny approval of the option issue to the employee. Her Honour stated at [54]:

It is only when the option-holder is in fact able to exercise the contractual right inherent in an option to acquire the shares that the option-holder can be said to have acquired the option. This cannot occur until the option is granted or 'vested'.

10. Kenny J's decision was affirmed by the Full Federal Court in Fowler v. FC of T [2013] FCAFC 69; (2013) 212 FCR 149; 2013 ATC 20-398. In the reasons of the Full Federal Court at paragraph [94], Besanko J, with whom Dodds-Streeton J agreed at paragraph [163], described the employee's right prior to shareholder approval as 'a right that may have led to the acquisition of a right to acquire shares, but... not a right to acquire shares.' At paragraph [156] Gordon J stated that, prior to shareholder approval, 'Mr Fowler merely had the right to insist that Nexus put the issue of Options to him to its shareholders for their approval.'

11. In view of the findings of the Court, the right Mr Fowler held under the contract prior to gaining shareholder approval was a right that came to an end when shareholder approval was granted. It was the shareholder approval, rather than the original right, that produced the employee's rights to acquire shares in his employer company for the purposes of former Division 13A of the ITAA 1936.

12. Applying this analysis to indeterminate rights under section 83A-340 of the ITAA 1997, where an employee acquires a right subject to shareholder approval and that right is only a right to have the matter put to the shareholders and nothing more, the right is not a right that later becomes a right to acquire a beneficial interest in a share. Rather, it is the shareholder approval that produces a (new) right in the employee to acquire the beneficial interest in a share. The original right to have the matter put to the shareholders does not have inherent in it the capacity to acquire property. It is not capable of becoming a right to acquire a beneficial interest in a share. It is therefore not an indeterminate right within the meaning of section 83A-340 of the ITAA 1997.

13. This view is consistent with the view of the Commissioner that, where an employee is granted a right but the ultimate provision of a benefit is subject to the discretion of the employer, that right is not a right to acquire the beneficial interest in a share for the purposes of former Division 13A of the ITAA 1936 or of Division 83A of the ITAA 1997 until such time as the discretion ceases to apply or is exercised in the employee's favour.^[1]

14. Section 83A-15 of the ITTPA applies to a right acquired before 1 July 2009 that, on or after 1 July 2009, becomes a right to acquire a beneficial interest in a share. The section provides that Division 13A of the ITAA 1936 is taken to have applied as if such a right had always been a right to acquire the beneficial interest in the share.

15. For the reasons given above, where before 1 July 2009 an employee acquired a right that was subject to shareholder approval and the right was only to have the matter put to the shareholders and nothing more, that right will not be an indeterminate right for the purposes of section 83A-15 of the ITTPA.

Note: where a right is granted subject to shareholder approval on terms providing that if shareholder approval is not obtained the employee will receive an amount of cash as compensation, the right is a right to receive property and would be an indeterminate right within the meaning of section 83A-340 of the ITAA 1997. Where the amount of cash offered is clearly inadequate as compensation, it would be necessary to consider whether the purpose of offering cash compensation is only to convert the right into an indeterminate right and bring forward the acquisition date for ESS interests to provide a tax benefit. In such a case, the general anti-avoidance provisions in Part IVA of the ITAA 1936 may apply.

© AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA

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Previously issued as TD 2014/D16

References

ATO references:
NO 1-5XC4RMO

Related Rulings/Determinations:

TR 2006/10
CR 2006/101
CR 2011/19

Subject References:
employee share schemes
indeterminate rights

Legislative References:
ITAA 1936 Pt III Div 13A
ITAA 1936 Pt IVA
ITAA 1997 83A-10(1)
ITAA 1997 83A-340
ITAA 1997 83A-340(1)
ITAA 1997 83A-340(2)
ITAA 1997 Div 83A
IT(TP)A 1997 83A-15

Case References:
Fowler v. Federal Commissioner of Taxation
[2013] FCAFC 69
(2013) 212 FCR 149
2013 ATC 20-398

Fowler v. Federal Commissioner of Taxation
[2012] FCA 1040
2012 ATC 20-351
Federal Commissioner of Taxation v. McWilliam
[2012] FCAFC 105
(2012) 204 FCR 478
2012 ATC 20-339
(2012) 89 ATR 845