• Cessation time

    The 'cessation time' will differ, depending on whether shares or rights have certain restrictions or conditions attached to them.

    Shares

    For shares that have no restrictions preventing their disposal and no conditions that may result in you forfeiting the share, the cessation time is when you acquire the shares.

    For shares that do have such restrictions or conditions, the cessation time is the earliest of the following:

    • when you dispose of the shares
    • the later of when the disposal restrictions cease to have effect and the forfeiture conditions cease to have effect in relation to the shares
    • when your employment in respect of which the shares were acquired ceases
    • 10 years from the date you acquired the shares.

    Rights

    The cessation time for rights is the earliest of the following:

    • when you dispose of the rights (other than by exercise)
    • when your employment in respect of which the rights were acquired ceases
    • when the rights are exercised, if the shares that are acquired by exercising the rights have no restrictions or conditions affecting their subsequent disposal or you forfeiting ownership of the shares
    • if there are such restrictions or conditions on the shares acquired by exercising the rights, when the last of the restrictions or conditions cease to have effect
    • ten years from the date you acquired the rights.

    Disposal restrictions

    Disposal restrictions are restrictions imposed by the employer or administrator of the employee share scheme that prevent the employee from disposing of shares for a certain period of time. See ATO ID 2008/121 for information about voluntary undertakings not to dispose of shares.

    The time disposal restrictions cease to have effect may be relevant to determining your cessation time.

    Disposal restrictions will cease to have effect on the date you are first able to dispose of your shares. If you choose not to dispose of your shares at this time, and at a later time the shares again become restricted, the cessation time will still be the first date on which you were able to dispose of the shares.

    Example 9a: Determining the cessation time for rights with disposal restrictions and trading windows

    Giles acquires 1,000 rights from his employer Fine Fashion Limited, on 29 October 2006, under an employee share scheme. The rights can be exercised in one year's time and expire after three years. The employee share scheme restricts disposal of the shares resulting from the exercise of the rights for two years after exercise. However, the scheme also provides two trading windows during the restriction period – one on 29 October 2007, and one on 29 October 2008. On those dates, the restrictions are lifted for a period of five working days.

    Giles exercises the rights on 5 May 2008. Because he is prevented from disposing of the shares, the cessation time happens on 29 October 2008 provided he is still employed until this time – that is, the disposal restrictions cease to have effect on the first date on which Giles is able to dispose of the shares.

    End of example

      

    Example 9b: Determining the cessation time for shares or rights where board approval to trade is required

    Lisa acquires shares from her employer Xyco Limited, on 29 October 2006, under an employee share scheme. The employee share scheme restricts disposal of the shares for a period of three years. However, the scheme also provides three trading windows during the three-year restriction period which commences on 30 March 2007, 30 March 2008, and 30 March 2009, for a period of five days. In accordance with the employer's policy on insider trading, certain employees must request the Xyco Limited board's approval to dispose of their shares during the trading windows by submitting a request and stating that at the time they do not believe they are in possession of material non-public information.

    On 30 March 2007, the first trading window opens. Lisa is an employee covered by the insider trading policy; however, she is not in possession of material non-public information at the time of the trading window. Lisa chooses to keep her shares and does not request approval to dispose of them. Because Lisa is still employed, the cessation time for Lisa's shares will be 30 March 2007 – that is, the first date on which she could have disposed of her shares by requesting approval, even though she chose not to do so. If Lisa was in possession of material non-public information at the time of the trading window, she would still be subject to disposal restrictions until the first time she is able to dispose of her shares.

    End of example

    Calculating the discount at cessation time

    The method for calculating the discount at cessation time will depend on whether you dispose of the shares or rights (or the shares acquired as a result of exercising the rights) within 30 days of the cessation time.

    If you dispose of the shares or rights at arm’s length within 30 days of cessation time, the discount is calculated as the amount of any consideration you receive for their disposal minus any consideration you provided to acquire the shares or rights.

    If you don’t dispose of shares or rights at arm’s length or within 30 days of the cessation time, the discount is calculated as the market value of the share or right (or the market value of the share acquired as a result of exercising the right) at cessation time minus any consideration you provided to acquire the shares or rights.

    In relation to rights, the discount is also reduced by any amount you pay to exercise the right.

    Example 10: Calculating the discount on qualifying shares disposed of within 30 days

    Joe acquires 1,000 qualifying shares for free from his employer, ABC Bank, on 30 August 2006, at a market value of $1 per share. The shares are subject to disposal restrictions. Joe does not make an election to assess the discount upfront.

    On 15 September 2007, Joe ceases employment with ABC Bank and the disposal restrictions on the shares are lifted. Joe sells the shares at arm’s length on 20 September 2007 for $5 per share.

    Joe has a cessation time on 15 September 2007, the date he ceases employment. Because Joe sells his shares five days later at arm’s length, Joe calculates the discount using the consideration he receives when disposing of his shares:

    consideration received for disposal of the shares
    (1,000 shares $5)


    $5,000

    less

     

    consideration paid to acquire shares

    Nil

    discount equals

    $5,000

    Joe includes the discount in his assessable income for the year in which the cessation time occurred, the 2008 income year.

    Refer to example 16 to see the CGT implications for Joe upon the disposal of the shares.

    End of example

      

    Example 11: Calculating the discount on qualifying rights not disposed of within 30 days

    Margaret acquires 500 qualifying rights for free from her employer, Seekco Mining, on 10 October 2007, at a market value of $1 per right. Margaret does not make an election to assess the discount on the rights upfront.

    Margaret exercises the rights on 1 May 2008. She pays an exercise price of $2 per right to acquire 500 shares at a market value of $17 per share. The shares have no restrictions on their disposal. Margaret sells the shares on 13 June 2008 for $18 per share, incurring a brokerage fee of $50 on the sale of the shares.

    Margaret has a cessation time of 1 May 2008, on the date she exercises the rights. Because Margaret does not sell the shares she acquires from exercising the rights within 30 days of the cessation time, she calculates the discount using the market value of the shares she acquired at cessation time:

    market value of the shares at cessation time
    500 shares $17

     

    $8,500

    Less

     

     

    consideration paid to acquire rights

    Nil

     

    consideration paid to exercise the rights
    500 rights $2


    $1,000


    $1,000

    discount equals

     

    $7,500

    Margaret includes the discount of $7,500 in her assessable income for the year in which cessation time occurs, the 2008 income year.

    Refer to example 17 to see the CGT implications for Margaret when she sells her shares.

    End of example

    Deducting brokerage costs when calculating the discount

    You cannot include brokerage costs when determining the amount of the discount to include in your assessable income. However, if you dispose of your shares (including shares that you acquired via the exercise of your rights) or rights within 30 days of the cessation time, any brokerage costs you incur as a result of selling your shares or rights are a deductible expense under section 8-1 of the Income Tax Assessment Act 1997.

    If you do not dispose of your shares or rights within 30 days of the cessation time, you cannot include brokerage costs as a deductible expense. However, when you dispose of the shares or rights, you will be able to include brokerage costs as part of your cost base when calculating your capital gain or loss. Refer to example 17.

      Last modified: 01 Jul 2015QC 16652