Acquiring shares or rights from an employee share scheme
When are shares or rights considered to be acquired from an employee share scheme
You acquire shares or rights from an employee share scheme if the shares or rights are acquired, whether directly or indirectly, in relation to your employment or in relation to any services you provide. If you pay any money, or provide any other consideration, to acquire the shares or rights, the consideration must be less than the market value of the shares or rights at the time you acquire them.
Amounts you forgo under an effective salary sacrifice arrangement (see paragraphs 19 to 23 in Taxation Ruling TR 2001/10External Link) do not form part of the consideration provided to acquire shares or rights from an employee share scheme.
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The date you acquire shares or rights may not necessarily be when the shares or rights are granted or issued to you. You acquire a share or a right when:
- the share or right is transferred to you, other than by a share issue
- in the case of a share, the share is allotted to you
- in the case of a right, your employer or another person creates a right (to acquire a share) in you
- you otherwise acquire a legal interest in the share or right
- you acquire a beneficial interest in the share or right.
In relation to rights, determining the date a right is created in you will depend on the facts of each case. You may receive rights to acquire shares under an individual employment contract or under a broad based employee share plan. Generally, your rights will be acquired from an employee share scheme when your employment contract is entered into or when you accept an offer received under an employee share plan.
However, your rights to acquire shares may also be subject to shareholder approval or your employer may retain the right to determine whether you ultimately receive shares or a cash equivalent. Under these circumstances, you will not acquire a right (to acquire a share) until shareholder approval is given or your employer decides that your rights will be satisfied by shares and not cash.
Find out more
TD 2014/21External Link Income tax: where a right to acquire a beneficial interest in a share is granted subject to shareholder approval, is the right an 'indeterminate right' within the meaning of subsection 83A-340(1) of the Income Tax Assessment Act 1997?
End of find out more
Under some employee share schemes, you may be able to nominate an associate to acquire the shares or rights. Special rules apply in this circumstance.
The transitional rules affecting employee share schemes include a rule for indeterminate rights. Indeterminate rights are those rights you acquire from an employer where your entitlement to a share or a specific number of shares is uncertain. For example, you may be provided with a right to acquire, at a future time:
- shares with a specified total value, rather than a specified number of shares
- a number of shares to be determined at a later time
- either shares or cash (at the discretion of the employer), or
- shares or a cash equivalent (where the entitlement to shares is subject to shareholder approval).
If you acquired the indeterminate right before 1 July 2009, and the right becomes a right to acquire a share on or after 1 July 2009, the old rules will apply as if the right had always been a right to acquire the share from the time that the indeterminate right was acquired.
So, if the discount on your rights would have been assessable at acquisition, it will need to be included in the income year the rights were acquired. If under the old rules, tax is deferred on the right beyond 1 July 2009, the right will be transitioned into the new rules consistent with other transitioned interests.
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Example 1: Acquiring rights
Saskia signs an employment contract with her new employer, Delco Corporate, on 10 March 2005. The contract states that Saskia’s remuneration package will consist of a salary, car allowance, cash bonus and 10,000 rights to acquire shares in the company (at no cost to Saskia). The rights to acquire shares, however, are subject to shareholder approval at the next annual general meeting (AGM). If the shareholders do not approve the rights to acquire shares, the contract provides that Saskia will instead receive an equivalent amount of cash remuneration.
On 16 May 2005, the shareholders at the AGM give their approval for the rights to acquire shares.
The point at which Saskia acquires the rights from an employee share scheme is when the rights (to acquire shares) are created in her. In addition to salary, a car allowance and cash bonus, Saskia’s employment contract includes further rights to remuneration that will be satisfied by either rights to acquire shares or a cash equivalent depending on shareholder approval.
When the shareholders give their approval on 16 May 2005, rights to acquire shares are created in Saskia such that she has acquired rights from an employee share scheme.
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When are shares or rights considered to be not acquired from an employee share scheme
Shares or rights will not be considered to be acquired from an employee share scheme in either of the following situations:
- if you pay money or provide other consideration to acquire shares or rights that is equal to, or more than, their market value at the time they are acquired
- when you exercise rights that you acquired from an employee share scheme – the shares that you acquire from exercising these rights are not considered to also be acquired from an employee share scheme.
While Division 13A does not apply to these shares or rights, the shares or rights may still be assessable under other provisions of the Income Tax Assessment Act 1936 and the Income Tax Assessment Act 1997 (including the CGT provisions).
In some circumstances, a right acquired from an employee share scheme that later lapses may also be deemed not to have been acquired – see Lapsing of rights for more information.
Determining the market value of shares and rights
Division 13A sets out a number of valuation rules to determine the market value of shares or rights acquired from an employee share scheme. The rules that will apply to determine the market value of shares or rights will depend on whether or not shares or rights are listed on an approved stock exchange.
If asked, your employer must provide information to enable you to calculate the market value of shares or rights.
Listed shares or rights
If the shares or rights are traded on an approved stock exchange, you can determine the market value of the shares or rights by using the weighted average of the prices at which the shares or rights were traded over a one week period (an average that takes into account the proportional relevance of the volume of shares traded at different prices), ending on the date the shares or rights are being valued for (for example, on the date the shares or rights are acquired). This is often referred to as the five-day weighted average.
If, during the one-week period, the shares or rights have not been traded, the market value is taken to be the last offer price to buy the shares or rights in that period. If no offers have been made, then the market value of the shares or rights must be determined in accordance with the market valuation rules for unlisted shares or rights.
If listed shares offered from an employee share scheme are acquired in accordance with a wider public offering of shares, different valuation rules may apply.
Unlisted shares or rights
The market value of unlisted shares is determined by either of the following:
- an arm’s length value of the share, made by a registered company auditor in a written report
- in accordance with a reasonable method approved by the ATO.
The market value of unlisted rights will be the greater of the following two amounts:
- the market value of the underlying shares (on the date the rights are being valued for) less the lowest exercise price. If the lowest exercise price is nil or can’t be determined, then the rights are treated as having the same market value as the underlying shares, or
- the value determined by using the formula and tables set out in sections 139FJ to FNExternal Link of the Income Tax Assessment Act 1936. Additionally, if the life of the rights is more than 10 years, an arm’s length value must also be determined by a qualified valuer in a written report. If the arm’s length value is greater than the value determined using the formulas and tables (based on an exercise period of 10 years), then the arm’s length value must be used.
Tax implications of acquiring shares or rights from an employee share scheme
In addition to any capital gains tax that may apply when you dispose of shares or rights from an employee share scheme, you must include in your assessable income what’s known as the ‘discount’ received on the shares or rights.
Generally, the discount is included in your assessable income in the income year you acquire the shares or rights. The amount of the discount is calculated at the date the shares or rights are acquired and is the difference between the market value of the shares or rights and the consideration, if any, that you provide to acquire them.
However, if the shares or rights are qualifying shares or rights, there are two alternative concessions that may be available to you when calculating and including the discount in your assessable income. Refer to Qualifying shares or rights for more information.
Example 2: Discount assessable on non-qualifying shares
Eliza acquires 800 employee class shares for free from her employer, Qbiz, on 10 March 2008 at a market value of $2.50 per share. The employee class shares are not ordinary shares because they have preferential rights to the payment of dividends. Therefore, they are not qualifying shares and the discount will need to be included in Eliza’s assessable income in the year she acquired the shares.
Eliza calculates the discount as:
market value on acquisition of the shares
800 shares $2.50
consideration paid to acquire shares
Eliza includes the discount of $2,000 in her assessable income for the 2008 income year.
Refer to example 13 for a discussion of the CGT implications for Eliza when she sells the shares.
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Tax implications if your associate acquires shares or rights from an employee share scheme
If you negotiate for an associate to acquire shares or rights from an employee share scheme (that are provided in relation to your employment or services you provide), the tax law still requires you to include the discount in your assessable income rather than your associate.
Example 3: Rights allocated to associate
As part of his remuneration package, Derek negotiates for his spouse, Sally, to acquire 700 rights from his employer, D2D Finance Company, on 21 September 2007. The rights provided to Sally are in relation to Derek’s employment. As a result, even though Sally acquires the rights from an employee share scheme, Derek will need to include the discount related to these rights in his assessable income for the 2008 income year.
Shares or rights acquired by your associate will not be qualifying shares or rights. Refer to Shares or rights acquired by your associate for more information.
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Lapsing of rights
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, and
- 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.
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 she 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, she 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.
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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, because he was not an employed by Delco at the time he acquired the rights.
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Qualifying shares or rights
A share in a company will be a qualifying share if it satisfies all of the following requirements:
- the share is acquired by you from an employee share scheme
- the company is your employer or your employer's holding company
- the shares or rights to shares available from the employee share scheme are ordinary shares or rights to ordinary shares
- after acquisition of the share, you do not hold a legal or beneficial interest of more than 5% of the shares in the company
- after acquiring the share, you are not in a position to cast, or control the casting of, more than 5% of the votes at the company's general meeting, and
- when you acquired the share, at least 75% of the permanent employees of your employer were, or at some earlier time had been, entitled to acquire shares or rights to shares from an employee share scheme of your employer or its holding company.
A qualifying right must satisfy the same requirements, except the last requirement above.
Shares or rights acquired by your associate
To be a qualifying share or right, one of the requirements is that the company in which the shares or rights are issued is the employer of the person who acquires the shares or rights (or is the holding company of the employer).
If your associate acquires the shares or rights in relation to your employment or services and is not an employee of the company or holding company issuing the share or right, the shares or rights will not be qualifying shares or rights.
This means that you, as the person required by law to include the discount in your assessable income, must include the discount in the income year in which your associate acquires the shares or rights.
Example 6: Rights acquired in relation to associate’s employment
Following on from example 3, Sally acquires 700 rights in relation to the employment of her spouse, Derek. These rights are not qualifying rights because Sally is not an employee of D2D Finance Company. As a result, Derek includes the discount on the 700 rights in the income year that Sally acquires the rights, which is the 2008 income year.
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Tax concessions available for qualifying shares and rights
The first concession available for qualifying shares or rights is that you can defer including the discount in your assessable income until a later year of income, up to a maximum of 10 years. The year you must include the discount in your assessable income will be the year in which an event, known as a ‘cessation time’, occurs.
Instead of deferring the discount, the second concession allows you to elect to be assessed upfront on all qualifying shares or rights you acquired in the income year. By making an election (often referred to as a section 139E election), the discount will be included in your assessable income in the year you acquire the qualifying shares or rights. Under this concession, if certain conditions, known as ‘exemption conditions’, are satisfied, you are only required to include the discount in your assessable income to the extent that it is greater than $1,000.
The deferral of the discount is the default concession for qualifying shares and rights. This means that, unless you make an election, the discount on all qualifying shares or rights will not be assessed until a cessation time occurs. The $1,000 exemption is not available if the discount is declared at cessation time.