Whether an employee has genuine restrictions on disposing of an option/right or share issued under an employee share scheme (ESS) can determine whether tax can be deferred, and until when, under the ESS.
The Australian Taxation Office (ATO) recently released Draft Taxation Determination TD 2021/D5 (Draft TD) on determining when ‘genuine disposal restrictions’ apply to interests provided under an ESS for the purposes of Division 83A of the Income Tax Assessment Act 1997.
ESSs give employees a benefit such as shares in the company they work for at a discounted price or options or rights to buy shares in the company in the future. Division 83A governs the taxation of ESS interests.
For ESS interests granted at a discount, the discount is prima facie assessable in the year the employee acquires the interest. However, where the ESS meets certain conditions, there can be a deferral of the taxing point until a later time. One ESS deferred taxing point occurs where “[i]f, at the time [the employee] acquired the interest, the scheme genuinely restricted [the employee] immediately disposing of the interest - the scheme no longer so restricts [the employee]”
The Draft TD sets out principles in determining whether a restriction on disposal of an ESS interest constitutes a genuine disposal restriction:
The scheme’s disposal restrictions must be sufficiently identifiable, certain, and legally enforceable, with serious consequences enforced when a breach occurs.
The requirement for an employee to make an application to their employer or a company discretion to allow trade does not necessarily constitute a genuine disposal restriction.
A board's discretion, without clear, fixed, objectively measured criteria to waive disposal restrictions, could result in an ESS interest not having a genuine disposal restriction, even if, in fact, the discretion is not utilised.
A restriction will not be precluded from being a genuine disposal restriction if it is able to be lifted in exceptional and extraordinary circumstances.
Genuine disposal restrictions can be through a scheme’s documentation, a company’s internal trading policy, the relevant employee’s employment contract, and any applicable ASX listing rules or Corporations Act 2001 restrictions.
The Draft TD includes four examples to assist in understanding the ATO's views.
The ATO considers in the Draft TD that:
For determining the deferred taxing point, the relevant lifting of the genuine disposal restriction is the first time that restrictions lift, even if temporarily; and
Genuine disposal restrictions can operate for a fixed or variable period, which may be determined by reference to performance or vesting conditions, internal share trading policies or insider trading prohibitions.
When finalised, the views in the Draft TD are to apply retrospectively. This may mean, based on the ATO’s views in the Draft TD, that some ESSs have an earlier deferred taxing point than previously thought.
Submissions on the Draft TD are due by 12 November 2021.
To discuss or for more information:
Neil Brydges
Principal Lawyer | Accredited Specialist in Tax Law
M +61 407 821 157 | T +61 3 9611 0176
E nbrydges@sladen.com.au
Lucy Liang
Lawyer
T +61 9611 0131
E lliang@sladen.com.au
