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The guidance clarifies “genuine” restrictions from disposing of shares and managing the determination of deferred taxing points.
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ATO finalises guidance on ESS disposal restrictions
11 April 2022
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The ATO has released TD 2022/4 that outlines when an employee is “genuinely restricted” from disposing of shares, or rights to acquire shares, in an employee share scheme.
“This Determination sets out the principles for working out whether a scheme’s disposal restrictions were ‘genuine disposal restrictions’ and, if they were, when you are no longer genuinely restricted by the scheme for the purposes of determining the ESS deferred taxing point,” the ATO said.
The ATO said many companies use an ESS to attract and retain high-quality staff.
Employees who receive ESS interests (shares or rights to acquire shares) at a discount were generally assessed on the amount of the discount at the time they acquire their ESS interest.
“However, the legislation allows for this taxing point to be deferred in some instances, including when the employee is genuinely restricted under the scheme from immediately disposing of their ESS interest,” the ATO said.
“In these circumstances, the deferred taxing point arises when this restriction is lifted.”
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The ATO said there must be an establishment of what disposal restrictions existed within the scheme at the time of the acquired ESS interest.
“You only need to consider whether these disposal restrictions were a genuine disposal restriction and, if they were, the time they no longer restricted you,” the ATO said.
“Disposal restrictions that were added or imposed by the exercise of a discretion after you acquired your ESS interest are not relevant to determining when your ESS deferred taxing point occurs.
“Restrictions imposed by the exercise of a discretion are only relevant if that discretion was exercised in a way that meant you were genuinely restricted from immediately disposing of your ESS interest at the time you acquired it.”
A genuine disposal would need to be sufficiently identifiable, certain and legally enforceable and contained in either the governing documents of the ESS, documented company policies and employee’s employment contract.
It would also need to result in serious and enforced consequences if breached.
“An employee will not be genuinely restricted from immediately disposing of their ESS interests where the employer has a broad discretion to allow the employee to trade,” the ATO said.
Conversely, a disposal restriction would not be genuine if it was open to manipulation such that it does not in a real, practical sense limit the disposal.
“A requirement to make an application to your employer or a company discretion to allow trade do not necessarily constitute genuine disposal restrictions,” the ATO said.
“This is because you control whether and when to apply for approval to dispose of your ESS interest.
“A broad discretion conferred on a company board will often allow unfettered lifting of restrictions based on a variety of subjective considerations.
“Where a board routinely approves requests to trade, this discretionary power is not a genuine disposal restriction. On the other hand, if there are clear, fixed and objectively measured criteria to be applied by the board the restriction may be a genuine disposal restriction.”
The Determination TD 2022/4 also contains detailed examples that illustrate what is and is not a genuine disposal restriction.
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