6. What happens if I never exercise rights that I acquire from an employee share scheme?
If you acquire rights from an employee share scheme, you will be treated as never acquiring the rights if both of the following two requirements are satisfied:
- you lose the rights without having exercised them
- the company, in which you had rights to acquire shares, was your employer (or was the holding company of your employer) at the time you acquired the rights.
If you satisfy these requirements and have previously included the discount related to the rights in your assessable income, you can amend your assessment to exclude the discount. The normal time limits for amending prior year assessments (generally two years) will not apply.
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If you negotiated for an associate to acquire the rights, you will not be able to amend prior year assessments to exclude the discount from your assessable income if the rights are later lost. This is because it is your associate, not you, who acquired the rights, and your associate was not employed by the company when the rights were issued.
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Example 4 - rights lapsing
Following on from example 1, Saskia, an employee of Delco Corporate, acquires 10,000 rights to acquire shares in Delco on 16 May 2005 for nil consideration. One of the conditions of the share scheme requires Saskia to forfeit ownership of the rights if Delco's share price does not reach $2 per share within three years of Saskia acquiring the right.
Saskia's rights do not satisfy the conditions to be qualifying rights. This means that Saskia must include the discount in her assessable income upfront, in the income year she acquires the shares. As a result, Saskia includes the discount on the rights when she lodges her tax return for the 2005 income year.
On 16 May 2008, three years after Saskia acquired the rights, Delco's share price has not reached $2 per share. As per the share scheme conditions, Saskia forfeits ownership of the rights.
Because Saskia has lost the rights without having exercised them and, at the time the rights were originally acquired, Saskia was employed by the company in which she had a right to acquire a share, Saskia satisfies the requirements to be treated as never having acquired the rights.
Accordingly, Saskia requests an amendment to remove the discount from her assessable income for the 2005 year. Even though the request is outside the normal two year time limit for amending prior year assessments, the time limit does not apply to the removal of the discount.
Example 5 - alienated rights lapsing
Following on from example 4, if, instead of acquiring the rights, Saskia had allocated the rights to her spouse, Jason, Saskia would still be required to include the discount related to the rights in her assessable income for the 2005 income year.
However, if Jason forfeits ownership of the rights three years later because Delco's share price does not reach $2, Saskia will not be able to amend her 2005 assessment to remove the discount related to the rights. This is because Jason does not satisfy the requirements to treat the right as never having been acquired, as he was not an employed by Delco at the time he acquired the rights.
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Last Modified: Thursday, 28 June 2012