The ATO recently released draft Taxation Determination TD 2014/D16 providing guidance on the Commissioner’s view of the operation of the indeterminate rights rules in the context of employee share schemes.

The timing of the acquisition of rights under the employee share scheme rules continues to be a fiercely contested issue and one which the Commissioner seeks to clarify in respect of the operation of the rules in the future. 

Like the decisions in recent employee share scheme (ESS) cases, the determination seeks to draw a distinction between the rights of employees to acquire ESS interests, depending on whether or not the issue of shares to the shareholder is subject to shareholder approval – adopting a position which is arguably, artificially narrow in the context and purpose of the indeterminate rights provisions.


Section 83A-340(1) Income Tax Assessment Act 1997 (Cth) (1997 Act) is essentially a timing rule which applies to ascertain the date that employees are deemed to have acquired an ESS interest under the employee share scheme rules.  Similarly, section 83A-15 Income Tax (Transitional Provisions) Act 1997 (ITTPA) applies to determine the timing of the acquisition of ESS interests, in circumstances where a right was granted prior to the commencement of Division 83A ITAA 97 on 1 July 2009 but the interest itself (i.e. the share) is granted after this date.

The proper timing of the date of acquisition of ESS interests for the purposes of determining the tax payable in respect of those interests has been the subject of recent litigation in the Federal and Full Federal Courts – most notably in Fowler v Federal Commissioner of Taxation [2013] FCAFC 69; (2013) 212 FCR 149. 

This draft determination and the issues considered in Fowler and similar cases, highlights the importance of correctly identifying which date income, or in this case indeterminate rights, are acquired.  A failure to do so can give rise to a tax shortfall, resulting in the issue of amended assessments and the imposition of administrative penalties.


The determination concludes that, in circumstances where a right to acquire a beneficial interest in a share is subject to shareholder approval, it will not be an ‘indeterminate right’ for the purposes of the ESS rules in Division 83A.  In reaching this conclusion, the Commissioner distinguishes between a right to receive something that is yet to be determined (which will fall within the provisions), and a right in respect of which it has not yet been determined whether the taxpayer will receive anything (which will not fall within the provisions). 


Based on recent case law, the law is quite settled on what is required to amount to a right to acquire a beneficial interest in a share (an ESS interest) for the purpose of the ESS rules.  On occasion, something less than an option will be an ESS interest (noting that, based onFederal Commissioner of Taxation v McWilliam [2012] FCAFC 105; (2012) 204 FCR 478, an unconditional right to acquire options will suffice).  However neither a mere right to accept an offer (Fraunschiel v Commissioner of Taxation (1989) 20 ATR 955), nor a conditional right to acquire options (Fowler) will be sufficient to amount to an ESS interest.

Yet, by its very nature, the beneficial interest in the right that is acquired to which the indeterminate rights provisions are applied must be something less than an ESS interest under the ESS rules. 

Certainly, the examples used in the legislation lend some support to the Commissioner’s interpretation as, in these examples rights are granted which entitle the holder to an indeterminate number of shares or cash and both may result in the acquisition of property (in the future).  As noted in the determination, this interpretation is also adopted by the Commissioner in Class Ruling (CR) 2011/19. 

However, the scenarios in the legislation are provided by way of clarification - there is no indication that the purpose and context of the legislation requires the interpretation of the provisions as adopted by the Commissioner.  Indeed, if the indeterminate rights provisions must be read so narrowly as to require a ‘right to property’ before the provisions may apply, there appear to be very few circumstances (other than those provided in the examples) which would invoke the operation of the provision.

The Commissioner in adopting this interpretation, appears to rely on a (perhaps artificial) distinction between whether a right acquired prior to July 2009 becomes a right to acquire shares, as opposed to whether that right comes to an end (for example, upon satisfaction of a condition such as shareholder approval) and is satisfied by the grant of a new right to apply for shares.

Despite the assertion in the Determination that the position adopted by the Commissioner is supported by the decision in Fowler, when referring to the conditional rights acquired by Mr Fowler prior to shareholder approval, Justice Besanko in his decision in that case noted that:

‘at [the date conditional agreement was reached, Mr Fowler] had an entitlement which may have led to the acquisition of shares.  It may be said that the directors' resolution was the source of the appellant's right to acquire shares…  All of these things may be accepted at a general level, but to my mind they do not address the essential question of the nature of the legal right the appellant had as at 14 September 2006.  That was a right that may have led to the acquisition of a right to acquire shares, but it was not a right to acquire those shares'.