Employee share schemes for unlisted shares and rights
Tax law sets out how shares, stapled securities and rights to acquire them (collectively known as ESS interests) are treated for tax purposes when acquired under employee share schemes – refer to the former Division 13A of the ITAA 1936 for ESS interests acquired before 1 July 2009 and Division 83A of the ITAA 1997 for ESS interests acquired after 30 June 2009.
The former Division 13A defines market value for unlisted shares acquired before 1 July 2009 as 'the arm's length value of the share' – paragraph 139FB(1)(b) of the ITAA 1936. This subsection allows us to approve, in writing, a reasonable method of calculating the arm's length value of unlisted shares. For example, an acceptable arm's length value might be one based on recent arm's length commercial transactions involving the unlisted shares.
For the purposes of the former Division 13A, the arm's length value of unlisted shares can be determined by a registered company auditor (in the relevant state or territory) who is not associated in certain capacities with the company – refer to the former section 139FG of the ITAA 1936. The auditor provides a written report in a form we approve. This report is given to the person from whom the taxpayer acquires the shares.
Division 83A of the ITAA 1997 uses the ordinary meaning of market value for determining the value of ESS interests acquired after 30 June 2009. However, where the expression 'market value' is used with its ordinary meaning, in some cases that meaning is affected by the rules in Subdivision 960-S of the ITAA 1997. Subdivision 960-S provides that any conditions and restrictions that prevent a taxpayer from converting the ESS interests into money are ignored in calculating market value – refer to section 960-410 of the ITAA 1997.
The method for calculating the value of an ESS interest acquired after 30 June 2009 can also be specified by regulation in the Income Tax Assessment Regulations 1997 (the Regulations) (see section 83A-315 of the ITAA 1997). Regulation 83A-5.01 says that for Division 83A of the ITAA 1997, the rules under the former Division 13A about valuing unlisted rights to acquire shares under an employee share scheme are preserved.
Section 960-412 of the ITAA 1997 provides that safe harbour valuation methods may also be specified by legislative instrument. From 1 July 2015 these apply to value unlisted shares in start-up companies.
As a general rule, we accept that the market value of the unlisted shares is a reasonable basis for establishing arm's length value. However, we will not usually rule where the request applies to future employee share acquisitions, because the facts we need to establish the market value may not be certain until the future acquisition happens – see Prospective market value in part A.