“Just when were those options acquired?” – Federal Court confirms tax treatment

Benefits received under employee share plans are subject to income tax at the date they are acquired, unless the terms of the grant allow tax to be deferred or tax exemption applies.  In this respect, the current rules contained in Division 83A of the Income Tax Assessment Act 1997 have continued the approach under the pre-1 July 2009 regime under Division 13A of the Income Tax Assessment Act 1936.


A critical question therefore is “when are share plan interests acquired?  This was the issue in a recent decision of the Full Court of the Federal Court of Australia in relation to the acquisition of options in 2003 under the old Division 13A, on appeal by the Commissioner of Taxation from a decision of the Administrative Appeals Tribunal. 


In this case, the taxpayer acquired options in accordance with his employment contract in 2003.  The taxpayer elected to pay tax upfront, and lodged a return on the basis the options were taxable on 1 July 2003, the date he commenced employment.  The ATO, however, sought to assess the options on their substantially higher value at the date shareholders approved the grant at the AGM on 28 November, or at 22 December, when the options were actually granted.


The Federal Court upheld the AAT’s finding on the facts that the taxpayer acquired the options themselves pursuant to his employment contract when he commenced employment on 1 July 2003 even though the options were not actually granted until after shareholder approval was obtained at the company AGM on 28 November (shareholder approval was not required for an acquisition in July because the taxpayer was only appointed as a director of the company on 3 September 2003).  This finding was sufficient to dispose of the appeal.


This decision illustrates the importance of all parties – the board and the employee – understanding just what they are agreeing to during the negotiation of the employment contract.


In relation to alternative submissions put for the Commissioner, the Full Federal Court confirmed the decision of the Tribunal that an employee who acquired a right to require their employer to issue options to purchase shares acquired a ‘right’ within the meaning of the old Division 13A rules.  The Court rejected the submission of the Commissioner of Taxation that an employee only acquires a relevant right upon the actual issue of the options under the employee share scheme.


According to the Full Court, the language of Division 13A did not support the Commissioner’s distinction between an interest in a right to acquire shares and an interest in a right to require the employer to provide the shares.  This meant that no uncertainty as to the taxing point arose.


This situation is more clearly dealt with in the new, post-1 July 2009 employee share plan tax regime contained in Division 83A.  Section 83A-340 provides that the acquisition of a beneficial interest in a right that later becomes a right to acquire a beneficial interest in a share is subject to the share plan tax rules as if it had always been a right to acquire a beneficial interest in a share.


Guerdon Associates reported on the original case in our June newsletter article HERE. The decision in Commissioner of Taxation v McWilliam [2012] FCAFC 105 (8 August 2012) is available HERE.


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