Gennai and Commissioner of Taxation (Taxation)
[2020] AATA 4667
•23 November 2020
Gennai and Commissioner of Taxation (Taxation) [2020] AATA 4667 (23 November 2020)
Division:TAXATION AND COMMERCIAL DIVISION
File Number: 2018/0763
Re:Gabriel Gennai
APPLICANT
AndCommissioner of Taxation
RESPONDENT
DECISION
Tribunal:Senior Member R Pintos-Lopez
Date:23 November 2020
Place:Melbourne
The Tribunal affirms the decision under review.
..............[sgd]........................................
Senior Member R Pintos-Lopez
Catchwords
TAXATION – OBJECTION DECISION - Employee Share Scheme - Notice of Amended Assessment objection – interests – shares - risk of forfeiture or loss - affirms the decision under review
Legislation
Administrative Appeals Tribunal Act 1975 (Cth) ss 25, 43(1)
Income Tax Assessment Act 1997 (Cth) ss 83A-5, 83A-10, 83A-120, 104, 105, 392-5(1)
Taxation Administration Act 1953 (Cth) ss 14ZY, 14ZY(1A)(b), 14ZY(2), 14ZZ(1), 14ZZK,392-1, 392-5
Cases
Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (2009) 239 CLR 27
Commissioner of Taxation v Consolidated Media Holdings Ltd (2012) 293 ALR 257
Fox and Commissioner of Taxation (Taxation) [2018] AATA 2791Overseas Tankship (UK) Ltd v The Miller Steamship Co Pty Ltd (The Wagon Mound (No 2)) [1967] 1 AC 617
Secondary Materials
Butterworth’s Concise Australian Legal Dictionary
Explanatory Memorandum to the Tax Laws Amendment Act (2009 Budget Measures No.2) Bill 2009
REASONS FOR DECISION
Senior Member R Pintos-Lopez
23 November 2020
The Applicant seeks review of a decision made by the Respondent, the Commissioner of Taxation (the Commissioner), dated 8 January 2018, disallowing an objection to a Notice of Amended Assessment in respect of the income year ending 30 June 2015, which increased the Applicant’s taxable income by $184,794 in respect of options to acquire shares, which were employee share scheme (ESS) interests, acquired by the Applicant under an ESS of his employer, Cloudera (Aust) Pty Ltd (Cloudera).
For the reasons that follow, the decision under review is affirmed.
BACKGROUND AND RELEVANT FACTS
In October 2013, the Applicant entered an employment contract with Cloudera. The contract provided for his position, a fixed salary as well as an incentive commission. Under the heading “Share Option Scheme”, the contract provided:
In addition to your salary and commission, we will recommend to Cloudera, Inc.’s Board of Directors at the time we have an Australian compliance stock option plan in place that you be granted an option to purchase 60,000 shares of the Company’s common stock at the then current fair market value for such shares as determined by the Board of Directors. We will further recommend that your option be subject to the terms and conditions of the Cloudera, Inc 2008 Equity Incentive Plan (as amended, if applicable, for operation in Australia) and you will be provided with a copy of those terms once the Australian plan is in place. You will be notified if the Board of Directors approves this grant of options.
The Cloudera, Inc. 2008 Equity Incentive Plan provides the terms for the grant of a proprietary interest in the company to certain employees and others (the Plan). The Plan provides for administration and interpretation of the scheme by a Plan Administrator.
Section 5 of the Plan provides that an “Award” — defined generally as any option, stock appreciation right, stock award, stock unit or cash-based award or other incentive payable in cash or in shares of common stock as designated by the Plan Administrator — may be granted to an employee, among others, selected by the Plan Administrator.
Section 7.1 of the Plan provides that the Plan Administrator may grant options designated as Incentive Stock Options or Nonqualified Stock Options. Section 7.2 provides that the exercise price for shares purchased under an Option shall be at least 100% of the “Fair Market Value of the Common Stock on the Grant Date determined by the Board, but no less than the minimum exercise price required by Section 8.3 with respect to Incentive Stock Options, except in the case of Substitute Awards”. Common Stock is defined as “common stock, par value $0.00005 per share of the Company being Cloudera, Inc., a Delaware corporation”.
Section 7.4 of the Plan entitled “Exercise of Options” provides:
The Plan Administrator shall establish and set forth in each instrument that evidences an Option the time at which, or the installments [sp.] in which, the Option shall vest and become exercisable, any of which provisions may be waived or modified by the Plan Administrator at any time. If not so established in the instrument evidencing the Option, the Option shall vest and become exercisable according to the following schedule, which may be waived or modified by the Plan Administrator at any time:
Period of Participant’s Continuous Employment or Service With the Company or Its Related Companies From the Vesting Commencement Date
Portion of Total Option That Is Vested and Exercisable
After 1 year
1/4
After each additional one-month period of continuous service completed thereafter
An additional 1/48
After 4 years
100%
To the extent an Option has vested and become exercisable, the Option may be exercised in whole or time to time in part by delivery to the Company of a properly executed stock option exercise agreement or notice, in a form and in accordance with procedures established by the Plan Administrator, setting forth the number of shares with respect to which the Option is being exercised, the restrictions imposed on the shares purchased under such exercise agreement or notice, if any, and such representations and agreements as may be required by the Plan Administrator, accompanied by payment in full as described in Sections 7.5 and 12. An Option may be exercised only for whole shares and may not be exercised for less than a reasonable number of shares at any one time, as determined by the Plan Administrator.
[Emphasis added]
Section 7.6 of the Plan sets out the effect of a termination of employment upon interests granted:
The Plan Administrator shall establish and set forth in each instrument that evidences an Option whether the Option shall continue to be exercisable and the terms and conditions or such exercise after a Termination of Service, any of which provisions may be waived or modified by the Plan Administrator at any time. If not so established in the instrument evidencing the Option, the Option shall be exercisable according to the following terms and conditions, which may be waived or modified by the Plan Administrator at any time:
(a) Any portion of an Option that is not vested and exercisable on the date of a Participant's Termination of Service shall expire such date.
(b) Any portion or an Option that is vested and exercisable on the date of a Participant's Termination of Service shall expire on the earliest to occur of:
(i)if the participant's Termination of Service occurs for reasons other than Cause, Retirement, Disability or death, the date that is three months after such Termination of Service;
(ii)if the Participant's Termination of Service occurs by reason of Retirement, Disability or death, the one-year anniversary of such Termination or Service; and
(iii)the Option Expiration Date.
[Emphasis added]
Section 17.1 of the Plan provides for the Board to amend, suspend or terminate the Plan at any time and in such respect it deems advisable. Subject to the consent of the Participant under section 17.3, the “Board may amend the terms of any outstanding Award, prospectively or retroactively.”
Various terms are defined by the Plan including:
"Grant Date” means the later of (a) the date on which the Plan Administrator completes the corporate action authorizing the grant of an Award or such later date specified by the Plan Administrator and (b) the date on which all conditions precedent to an Award have been satisfied, provided that conditions to the exercisability or vesting of Awards shall not defer the Grant Date.
…
“Option” means a right to purchase Common Stock granted under Section 7.
…
“Vesting Commencement Date” means the Grant Date or such other date selected by the Plan Administrator as the date from which an Award begins to vest.
On 10 December 2013, the Applicant signed a document entitled “Cloudera, Inc. 2008 Equity Incentive Plan Stock Option Grant Notice” (the Grant Notice). The Grant Notice provided that Cloudera, Inc:
hereby grants to you an Option (the “Option”) to purchase shares of the Company’s Common Stock under the Company’s 2008 Equity Incentive Plan (the “Plan”). The Option is subject to all the terms and conditions set forth in this Stock Option Grant Notice (this “Grant Notice”), in the Stock Option Agreement and in the Plan, which are attached to and incorporated into this Grant Notice in their entirety.
The Grant Date in the Grant Notice is 8 November 2013 and the Vesting Commencement Date is 14 October 2013. The grant provided for 60,000 shares of Cloudera, Inc. at an exercise price per share of $3.64. The option expiration date is 7 November 2023, subject to earlier termination in accordance with the terms of the Plan. The type of option is stated to be a non-qualified stock option.
At the Vesting and Exercisability Schedule, the Grant Notice provides:
One-fourth (1/4th) of the total number of shares subject to the Option shall vest and become exercisable on the one year anniversary of the Vesting Commencement Date, and 1/4th of the total number of shares subject to the Option shall vest on each subsequent one year anniversary of the Vesting Commencement Date thereafter, for a total vesting period of four years.
On or about 16 October 2014, the Applicant was terminated. On that date, according to the Applicant, he was provided with an employment termination report and an Option Exercise Notice. The termination report, referred to in the Applicant’s first statement, provided that:
(a)the Applicant has been granted 60,000 shares on 8 November 2013;
(b)the exercise price per share was USD $3.64;
(c)only 15,000 of the Applicants shares have vested and are exercisable;
(d)the total price to exercise the 15,000 shares is USD $54,600 (being 50,000 multiplied by USD $3.64); and
(e)the last day to exercise the option is 16 January 2015.
The Option Exercise Notice, according to the Applicant stated:
Your official termination date is October 16, 2014, and vesting ceased as of that date. You have until close of business on January 16, 2015… to exercise 15,000 vested shares. If you wish to exercise your options, you need to complete the attached Exercise Notice & Stock Option Purchase Agreement, the Rule 701 Disclosure Acknowledgement and make payment to the company in the amount of $3.64 per share. The Agreement and the payment must both be delivered to Cloudera on or prior to January 16, 2015.
On or before 31 December 2014, the Applicant paid the amount required to purchase 15,000 common shares of Cloudera.
On 1 January 2015, the Applicant executed an Exercise Notice and Stock Purchase Agreement, which listed 15,000 as the “Total number of shares for which the Option is being exercised now…” for a “total exercise price of Shares of $54,600 at an exercise price per share of USD$3.64”.
On 9 January 2015, the Applicant became the record holder of 15,000 shares of Cloudera Inc. common stock. A document entitled “Receipt for NSO Exercise” acknowledges receipt by Cloudera of $54,600 from the Applicant in payment for 15,000 shares of common stock.
On 14 July 2015, Cloudera issued an Employee Share Scheme Statement for the Applicant, which provided an employee summary for year ending 30 June 2015. The statement listed in the line-item for “discount from deferral schemes”, an amount of $184,794. That statement was issued by the company in accordance with s 392-5 of Schedule 1 of the Taxation Administration Act 1953 (Cth) (the TAA).
On 15 February 2017, the Applicant lodged an income tax return for the year ending
30 June 2015. That return did not account for or contain an item in respect of the Cloudera, Inc. shares.
On 4 January 2017, the Australian Tax Office (the ATO) sent a letter entitled “tax return lodgment” to the Applicant stating that based on the information it had received that the Applicant may need to lodge a tax return for the financial year ended 30 June 2015. That letter provided a summary of estimated income for that financial year, which included an amount for an ESS discount from deferral schemes of $184,794. The income schedule attached a table with information reported to the ATO by Cloudera in relation to the plan “2018 equity incentive plan” with a plan date of 16 October 2014 in the amount notified.
On 22 February 2017, the ATO issued a Notice of Assessment for the year ended 30 June 2015. The Notice of Assessment was predicated on the information contained in the Applicant’s income tax return for the 2015 year.
On 23 March 2017, the ATO issued a notice of Amended Assessment for the year ended 30 June 2015. The notice identified necessary adjustments for $184,794 in relation to a discount from deferral schemes, thereby increasing the Applicant’s taxable income by that amount.
On 29 June 2017, the Applicant objected to the amended assessment on a number of bases which are not relevant for the purpose of this application that did not include the basis for the present objection, which is that there was no real risk that, under the terms and conditions of the Plan, the Applicant would forfeit or lose the options for the purposes of s 83A-105(3) of the Income Tax Assessment Act 1997 (Cth) (the ITAA 1997). At the hearing, unopposed by the Commissioner, I granted the Applicant leave to object on the above-basis.
On 8 January 2018, the Commissioner disallowed the objection.
On 14 February 2018, the Applicant applied to the Tribunal for a review of the 8 January 2018 decision.
On 11 November 2018, the Applicant filed a Statement of Facts, Issues and Contentions as well as a document of that date that the Applicant submits ought be considered a witness statement from the Applicant. That statement provided:
On 8 November 2013, [I] was not of the view and had no reason to be of the view that there was a real risk that under the conditions of the … 2008 Equity Incentive Plan [I] would forfeit or lose the options.
On 23 May 2019, the Applicant signed a supplementary witness statement attesting that, prior to being employed by Cloudera, he had been employed, in chronological order, for 5, 3, 11, 8 and 5.5 years by his previous employers.
RELEVANT PROVISIONS
The provisions applicable to the reviewable objection decision are contained in the ITAA 1997, in particular, Division 83A. That Division concerns employee share schemes and the way those schemes are to be subject to income tax.
The discount provided to an employee in relation to an ESS interest is included in the assessable income in the year in which the interest is acquired under Subdivision 83A-B of the ITAA 1997 unless Subdivision 83A-C applies. Where Subdivision 83A-C applies to the ESS interest, the amount is included in the income year in which the ESS deferred taxing point for the ESS interest occurs.
Subdivision 83A-C of the ITAA 1997 applies when the conditions of s 83A-105(1) are satisfied. In respect of the relevant income years, s 83A-105(1) provided:
This Subdivision applies, and Subdivision 83A-B does not apply, to an *ESS interest in a company if:
(a) Subdivision 83A-B would, apart from this section, apply to the interest (see section 83A-20); and
(aa) after applying section 83A-315, there is still a discount given in relation to the interest; and
(b) subsections 83A-35(3), (4), (5) and (9) apply to the interest; and
(c) if the interest is a beneficial interest in a * share:
(i) subsection (2) of this section applies to the interest; and
(ii) subsection (3) or (4) applies to the interest; and
(d) if the interest is a beneficial interest in a right to acquire a beneficial interest in a share--subsection (3) or (6) applies to the interest.
Section 83A-105(3)(b) of the ITAA 1997 provided at the relevant time in part:
if the ESS interest is a beneficial interest in a right to acquire a beneficial interest in a share:
(i) there is a real risk that, under the conditions of the scheme, you will forfeit or lose the ESS interest (other than by disposing of it, exercising the right or letting the right lapse); or
(ii) there is a real risk that, under the conditions of the scheme, if you exercise the right, you will forfeit or lose the beneficial interest in the share (other than by disposing of it).
Section 83A-120 of the ITAA 1997 provides for a number of ESS deferred taxing points in relation to rights to acquire shares. This includes where:
(a)the taxpayer has not exercised the right, but there is no longer a real risk of forfeiture or loss or any restriction on disposal of the interest;
(b)the taxpayer’s employment ends;
(c)at the end of the 7 year period from the date of acquisition of the ESS interests; and
(d)there is no real risk of forfeiting or losing the right or the underlying share under the terms of the scheme, and the terms of the scheme no longer restrict the exercise of the right of the disposal of the share.
If an employee receives ESS interests and did not pay anything to receive them or paid less than market value, the difference between the amount the employee paid and the market value of the ESS interest is known as the discount.
A taxpayer’s assessable income for the income year in which the ESS deferred taxing point for the interest occurs includes the market value of the interest at the ESS deferred taxing point, reduced by the cost base of the interest under s 83A–110 of ITAA 1997.
CONSIDERATION
The Applicant objected to the inclusion of a sum of $184,794 in his assessable income for the financial year 2015. That amount represented the discount in respect of ESS interests acquired by the Applicant pursuant to an ESS of his then employer, Cloudera.
A number of matters that were not in dispute, were that:
(a)the Plan was an employee share scheme within the meaning of s 83A-10(2);
(b)the 60,000 options granted to the Applicant, including the 15,000 options that eventually vested, were “ESS interests” within the meaning of s 83A-10(1);
(c)each of the options was a “beneficial interest in… a right to acquire a beneficial interest in a share…”;
(d)the options were acquired by the Applicant at a discount on 8 November 2013; and
(e)s 83A-20(2) does not apply in the circumstances.[1]
[1] The Commissioner properly noted in his Statement of Facts, Issues and Contentions a number of matters that were not in dispute. The Commissioner’s analysis in relation to the satisfaction of the various conditions of s 83A-105(1) was not opposed except for the last (d) (that is where the time that the options were granted there was a real risk that, under the conditions of the scheme, the Applicant would forfeit or lose the options): at [45]-[47].
The Applicant submits that the Commissioner’s decision ought to be set aside as the conditions of s 83A-105(3)(b)(i) of the ITAA 1997 are not satisfied and that, as a consequence, Subdivision 83A–C does not apply. That question turns upon the meaning of what constitutes “a real risk” that, under the conditions of the scheme, the taxpayer will “forfeit or lose” the ESS interest.
The Commissioner submits that, on its proper construction, the question posed is whether, objectively, there is an actual possibility of forfeiture or loss of the ESS interest that is more than a mere possibility or rare eventuality. He submits that this construction is supported by the plain and ordinary meaning of the words “real risk”, defined in Butterworth’s Concise Australian Legal Dictionary (referring to Overseas Tankship (UK) Ltd v The Miller Steamship Co Pty Ltd (The Wagon Mound (No 2)) [1967] 1 AC 617) as being “one that a reasonable person would not brush aside as being far-fetched or fanciful”.
The Commissioner says that this construction is further supported by the context of the statute in particular, the Explanatory Memorandum to the Tax Laws Amendment Act (2009) Budget Measures No.2 Bill 2009, which added Division 83A into the ITAA 1997, and which provides:
The “real risk of forfeiture test” does not require employers to provide schemes in which there [ESS interest] are at significant or substantial risk of being lost. However, real is regarded as something more than a mere possibility. Something is not a real risk if a reasonable person would disregard the risk is highly unlikely to occur or is nothing more than a rare eventuality of possibility.[2]
[2] See also the earlier ATO Interpretative Decision 2010/61 (stating that the Explanatory Memorandum assist in identifying the purpose of the “real risk of forfeiture test” in Subdivision 83A-C of the ITAA 1997).
The Commissioner refers to my earlier decision of Fox and Commissioner of Taxation (Taxation) [2018] AATA 2791 at [63], which applied s 83A-120(4) of the ITAA 1997 to defer the taxing point of the Applicant’s performance rights. In that application, the vesting requirements were that the Applicant remain an employee and that the company make a public announcement, at one date, that it had reached financial close on financing, and at a later date, when the company publicly announced that it had successfully launched a satellite into orbit and successfully completed in-orbit testing. The Commissioner submits that, implicitly, these factors in relation to a real risk of forfeiture are objective.
The Applicant submits that there is no judicial consideration of the phrase “real risk of forfeiture” in the context of revenue legislation. In relation specifically to s 83A-105(3)(b)(i) of the ITAA 1997, the Applicant submits, among other things, that the provision is silent as to whether it is to be applied objectively or subjectively. He submits that an assessment must include consideration of the entirety of the Plan including the power of the Plan Administrator to alter or waive the provisions at any time and necessarily implies the need to consider the employment in which the Plan operates, which he extends to include the character or nature of the Applicant’s employment, the terms of the Applicant’s employment contract and his previous employment history. At the hearing, the Applicant’s counsel, submitted that the proper assessment was an objective test to be applied subjectively.
In terms of its application, the Applicant submitted that the circumstances to be taken into account included the Applicant’s past employment history and certain provisions of his employment contract. He submits, applying the test proposed, that, at 8 November 2013, there were no grounds to foresee the termination of the Applicant’s employment within
12 months or to conclude that the Applicant’s employment would not extend beyond 12 months.Application
The provisions of the ITAA 1997 are determinative. The discount in relation to ESS interests is to be included in the assessable income of the Applicant in the year they were acquired, unless Subdivision 83A–C applies to make those interests assessable in the income year in which the ESS deferred taxing point occurs.
Subdivision 83A-C of the ITAA 1997 applies where the conditions of s 83A-105(1) are satisfied. Relevant to the present determination is s 83A-105(1)(d) where the interest is a beneficial interest in a right to acquire a beneficial interest in a share and s 83A-105(3) applies.
Section 83A-105(3)(b)(i) of the ITAA 1997 contains the essential question to be determined: whether there is a real risk that, under the conditions of the scheme, the Applicant would forfeit or lose the ESS interest (other than by disposing of it, exercising the right or letting the right lapse).
The employment contract between the Applicant and Cloudera referred to a share option scheme for the grant of an option to purchase 60,000 shares in the company. The Plan contains terms for a share option scheme including at s 7.1 that a plan administrator has discretion to grant incentive stock options or non-qualified stock options, that the exercise price for the shares purchased under those options would be at least 100% of the fair market value of the shares (s 7.2 of the Plan) and that the plan administrator would establish an instrument that evidenced that option and the time at which, or instalments in which, the option shall vest and become exercisable (s 7.4 of the Plan). Exercise of the option consists of delivery of an executed stock option exercise agreement and payment in full for the shares: s 7.4 of the Plan.
The instrument evidencing the option in this case is the Grant Notice by which on 8 November 2013, Cloudera, Inc. granted the Applicant an:
“Option (the “Option”) to purchase shares of the Company’s Common Stock under the Company’s 2008 Equity Incentive Plan (the “Plan”). The Option is subject to all the terms and conditions set forth in this Stock Option Grant Notice (this “Grant Notice”), in the Stock Option Agreement and in the Plan, which are [as attached]… incorporated.
(Emphasis added.)
The Grant Notice and the Plan subjected the interest granted to certain conditions. The Grant Notice, for its part, provided that:
One-fourth (1/4th) of the total number of shares subject to the Option shall vest and become exercisable on the one year anniversary of the Vesting Commencement Date, and 1/4th of the total number of shares subject to the Option shall vest on each subsequent one year anniversary of the Vesting Commencement Date thereafter, for a total vesting period of 4 years.
As a result of the Grant Notice, the interest granted was subject to the condition that one quarter of the shares would vest and become exercisable one year from the Vesting Commencement Date which was 14 October 2013. The grant, which satisfies the condition of being a beneficial interest in a right to acquire a beneficial interest in a share, did not immediately vest, and on one view did not become an option until a later date, and was not exercisable until 14 October 2014. In this case, the option expiration date is
7 November 2023.The Plan, as incorporated by the Grant Notice, provided further conditions in relation to the interest. Section 7.6 of the Plan provides — where the instrument evidencing the option, in this case the Grant Notice, does not establish whether the option shall continue to be exercisable after termination of service, which in this case it does not — that:
(a)any portion of an option that is not vested and exercisable on the date of termination of service shall expire on that date; and
(b)any option that is vested and exercisable on the date of termination shall expire at the option expiration date, which on the face of the Grant Notice is 7 November 2023.
That last date is to be contrasted with the documents received on 16 October 2014 by the Applicant that stated that the Applicant had until 16 January 2015 to enter into the option agreement and pay the amount due for the shares. Nothing turns on this difference. The binary terms of the conditions imposed upon the interest granted under the Grant Notice was that from the date of termination any portion of that interest not vested and exercisable would expire.
According to the terms of the Grant Notice, by the date of the Applicant’s termination, that is 16 October 2014, the one year anniversary of the Vesting Commencement Date, 14 October 2013, had passed and accordingly one quarter of the interest being an option for 15,000 Cloudera, Inc. shares vested and became exercisable. The Plan operated to terminate the remaining three quarters of the grant as, at 16 October 2014, they had not vested and were not exercisable.
An understanding of the application and ambit of legislative provisions, such as s 83A-105(3)(b) of the ITAA 1997, involves a process of statutory construction. The Applicant properly refers to[3] Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (2009) 239 CLR 27, in which Hayne, Heydon, Crennan and Keifel JJ, state that:
This court has stated on many occasions that the task of statutory construction must begin with a consideration of the text itself. Historical considerations and extrinsic materials cannot be relied on to displace the clear meaning of the text. The language which has actually been employed in the text of legislation is the surest guide to legislative intention. The meaning of the text may require consideration of the context, which includes the general purpose and policy of a provision, in particular the mischief it is seeking to remedy.
The commissioner’s first argument must be rejected. The construction given by the commissioner to the words “‘lease’… does not include … an option to renew a lease” was strained and contrary both to the natural and ordinary meaning of the words and to considerations of grammar and syntax.[4]
[3] The Applicant cites a similar proposition in Commissioner of Taxation v Consolidated Media Holdings Ltd (2012) 293 ALR 257 at [39].
[4] At [47]-[48].
The natural and ordinary meaning of the words of s 83A-105(3)(b) of the ITAA 1997 are clear and unambiguous. The context and mischief sought to be remedied by the provision support that natural and ordinary meaning. The focus of consideration is to the conditions of the scheme and whether under those conditions there is a real risk of forfeiture or loss of the interest. The scheme relevant to this application is the Plan. The Plan provides for the Grant Notice, which in turn incorporates the terms and conditions of that Plan.
The question of whether an assessment of a real risk of loss of forfeiture involves an objective assessment from the point of view of a reasonable person or a subjective assessment is misguided. Similarly, any reliance upon further descriptors of the word “real” such as it not being fanciful or far-fetched.
Section 83A-105(3)(b) of the ITAA 1997 involves, on the one hand, an assessment of whether there is a risk that the conditions of a scheme would result in forfeiture or loss of an interest. In addition, there is the requirement that the risk be a “real” risk. In an assessment of that risk, the provision neither directs itself to the mind of a reasonable person nor to the subjective assessment of the taxpayer.
It is for the Tribunal who acts as decision-maker to assess the risk. In the premises of the conditions of the scheme, the question is whether the Plan conditions pose a real risk of loss of forfeiture.
A consideration of the conditions of the scheme in order to assess risk ought not be construed as being limited to the words of the scheme alone. The bracketed words of
s 83A-105(3)(b) of the ITAA 1997 draw attention to the required analysis insofar as they refer to a loss other than by disposal, exercise or letting the right lapse. Those matters are directed to a risk of loss or forfeiture other than by a disembodied assessment of the words of the scheme alone.The facts relevant to an assessment of risk in my earlier determination in Fox and Commissioner of Taxation (Taxation) [2018] AATA 2791 involved an assessment of the conditions of a scheme which provided that, among other things, the ESS interest would not vest until the happening of external events, in that case the company making two market announcements. The risk of the occurrence of that event, as indeed past occurrences of that event, could be factors relevant to the assessment of whether the conditions of a scheme pose a real risk that the ESS interest will be forfeited or lost.
The starting point is the scheme and the conditions of the scheme which affect the assessment of risk. Insofar as those conditions give rise to an assessment of events outside of the strict wording of the scheme itself, those events may be relevant to the assessment of risk.
Assessment of whether there is a real risk that, under the conditions of a scheme, a taxpayer will forfeit or lose an ESS interest involves an examination of the wording of scheme conditions relevant to forfeiture or loss. Circumstances that arise from those conditions may impact on an assessment of whether those conditions pose a risk of forfeiture or loss.
When applied to the conditions of the scheme that gave rise to the grant by the Grant Notice and by which the terms and conditions of the Plan were incorporated, the vesting and exercise of the 60,000 shares granted to the Applicant, on the face of the Grant Notice at 8 November 2013, were subject to the:
(a)effluxion of time commencing one year from the Vesting Commencement Date, 14 October 2013; and
(b)extinguishment of the grant under the Plan at termination of employment before each of four years from that date.
As at 8 November 2013, those conditions posed a real risk of forfeiture or loss of the interest granted to the Applicant, being a beneficial interest in a right to acquire a beneficial interest in 60,000 shares of Cloudera. The past work history of the Applicant may be a circumstance that affects the risk of termination but would not sensibly surmount the countless ways in which the Applicant could cease employment in the course of one year let alone an assessment of each of four years. The risks that the Applicant could lose his job in the course of one year amounted to a real risk that the conditions of the scheme so imposed would result in forfeiture or loss of the interest granted on 8 November 2013. Accordingly, Subdivision 83A-C applied to the Applicant’s ESS interests and operates to defer inclusion of the discount in the Applicant’s assessable income to the income year ending 30 June 2015.
DECISION
The Tribunal affirms the decision under review.
I certify that the preceding 65 (sixty-five) paragraphs are a true copy of the reasons for the decision herein of Senior Member R Pintos-Lopez
.......................[sgd].................................................
Associate
Dated: 23 November 2020
Date of hearing: 24 May 2019 Counsel for the Applicant: Mr Chris Wallis Counsel for the Respondent: Mr Fiona Cameron
0
3
0