On Wed 2.11.2016, the ATO released Taxation Determination TD 2016/17, which outlines the circumstances in which a contractual right becomes a ‘right to acquire a beneficial interest in a share’ for the purposes of s83A-340(1) of the ITAA 1997. The Determination also applies to s83A-15 of the Income Tax (Transitional Provisions) Act 1997, where the same issue arises.

  • Section 83A-340(2) of the ITAA 1997 deems an intermediate ‘right to acquire a beneficial interest in a share’ as if it had always been a right to acquire such an interest. The relevant right is one that becomes ‘a right to acquire a beneficial interest in a share’ (ss(1)).
  • Section 83A-15 of the Transitional Provisions Act is in similar terms in applying the old employee share scheme provisions (Div 13A of the ITAA 1936) to intermediate rights.

Paragraph 2 of the determination says as follows.

  1. A right that becomes a right to acquire a share when a condition of the contract is satisfied must be enforceable against the other party under the terms of the contract, even if only to the extent of the condition. The relevant condition can be one to be fulfilled by either the employee or the employer. However, the condition to be satisfied must be an essential or required precondition for the right to acquire a share being provided. That is, its satisfaction must directly cause the employee to have a right to acquire a share. This condition is a condition ‘precedent to performance’.

Applying this rule of this ‘right’ having to be enforceable, the determination works through the follow examples – very briefly summarised below (the most interesting is example 4).

  1. No contractual rights created (for instance, a general proposal to have an employee share scheme is announced to staff) – RESULT: not even an intermediate right.
  2. A right that becomes an indeterminate right (for instance, fully settled rights awarded only on the remuneration committee’s determination) – RESULT: intermediate rights created.
  3. Rights in employment contracts before the employment commences (for instance, a term of an employment contract that the employee will get a fixed number of rights under the ESS, once he commences employment) – RESULT: only intermediate rights created.
  4. Conditions precedent to the grant of rights, and conditions precedent to the exercise of rights (for instance, an employment contract right to acquire ESS option rights if the employee meets certain performance hurdles and can then only exercise those rights (to acquire shares) if the share price meets a benchmark level) – RESULT: she has intermediate rights before meeting the performance hurdles then actual ESS rights before knowing if she can exercise her options.

The Determination was previously issued as Draft Determination TD 2016/D3 and is substantially the same. It contains minor changes in the notes section of example 2 and the addition of a note in example 3 to provide clarification on when right arise. Generally, the determination applies to schemes begun to be carried out on or after 9 September 2015.

[ATO site – TD 2016/17] [LTN 212, 2/11/16]