ATO ruling logic appears inconsistent with options tax treatment

ATO Tax Ruling 2010/6, issued on 22 September 2010, confirms the income tax, PAYG withholding and fringe benefits tax treatment associated with the operation of employee benefits trusts.


Questions addressed in the ruling include whether, and in what circumstances, a payment received by an employee as a result of the redemption of bonus units in the trust constitutes a payment of salary or wages or compensation, benefits or bonuses within the definition of income according to ordinary concepts (under section 6-5 of the Income Tax Assessment Act 1997), or compensation, a benefit or bonus provided in relation to employment (under section 15-2).


According to the ruling, an employee does not derive ordinary or statutory income from the provision of personal services until the income either has been received by them, or is applied or dealt with on behalf of, or as directed by, the employee.  An employee will not derive an amount of salary or wages or bonus income if that employee acquires only a right to receive the salary or wages or bonus income.


As our regular reader will understand, this contrasts with the treatment of options under the revised employee share plan tax rules introduced by the Rudd Labor government in 2009.  Employee share options are now subject to income tax (under Division 83A of the Income Tax Assessment Act 1997) at grant (if they are not subject to a forfeiture condition), or on vesting (if subject to a forfeiture condition), even if they are underwater at that time.  And there will be no refund of the tax paid if the employee is not able to exercise the options because they remain underwater until they expire. 


Many argued that employee options should continue to be subject to income tax when they are exercised, as was the case under the previous rules.  The argument was that until options are exercised, and the employee receives the proceeds, no income has been derived and it is unreasonable to expect employees to pay tax on ‘income’ they have not actually received.  The principles enunciated in this particular tax ruling have not been the principles employed, it seems, in framing the legislation for share scheme taxation treatment when payment is made in the form of share options.


For those interested in such things, the ATO ruling makes a good read (see HERE for details of the ruling and its underlying facts).

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