• Disposing of shares or rights acquired from an employee share scheme

    CGT implications

    Subdivision 130-D of the Income Tax Assessment Act 1997 contains special rules for employee share schemes to ensure there is no double taxation on income resulting from the acquisition and disposal of shares or rights acquired from these schemes.

    When a CGT event happens to a share or right acquired from an employee share scheme, the capital gain or loss will need to be calculated in accordance with the rules applicable to that event. However, the CGT implications will vary depending on the CGT event that occurs, and whether you have elected to assess the discount upfront or defer assessing the discount until a cessation time occurs.

    CGT implications when exercising rights to acquire shares

    While a CGT event happens when you exercise rights to acquire shares (CGT event C2: cancellation, surrender or similar ending), any capital gain or loss is disregarded. However, when you dispose of the shares you have acquired through the exercise of the rights, you will need to account for any capital gain or loss. See example 15.

    Entitlement to the 50% CGT discount

    Regardless of how the discount has been assessed, if you hold the shares or rights for 12 months or longer, you are eligible for the 50% discount on any capital gains you make on the disposal of the shares or rights.

    CGT implications for shares or rights acquired by your associate

    If you negotiate for shares or rights from an employee share scheme (that are provided in relation to your employment or to services you provide) to be acquired by your associate rather than yourself, you will not have any capital gains tax implications. However, as explained in Tax implications if your associate acquires shares or rights from an employee share scheme, you will still be liable to include the income related to acquiring the shares or rights in your assessable income.

    Your associate will need to consider the CGT implications when they dispose of the shares or rights.

    Attention

    If you allocate shares or rights to an associate after you have acquired them, you will have CGT implications because you have disposed of the shares or rights by providing them to your associate.

    End of attention

    Example 12: CGT implications when rights acquired by associate

    Following on from example 6, Sally acquires 700 rights for nil consideration from D2D Finance Company in the 2008 income year. The rights are provided in relation to her spouse Derek’s employment with D2D Finance Company. Derek includes the discount related to the rights in his assessable income for the 2008 income year. Because Derek did not acquire the rights before allocating them to Sally, he does not have any CGT implications.

    When Sally disposes of the rights to acquire shares in D2D Finance Company, or when she sells the underlying shares (that she acquires from exercising the rights), she will need to calculate the CGT gain or loss in accordance with the rules applicable to the CGT event that occurs.

    End of example

    CGT implications when disposing of shares or rights on which the discount was assessed upfront

    If you are assessed on the discount upfront on your shares or rights, you will need to account for any capital gain or loss when a CGT event happens in relation to those shares or rights.

    When calculating the capital gain or loss, the relevant market value to include as the first element of the cost base or reduced cost base will be the market value of the shares or rights on the date you acquired them. The acquisition date of shares, which were attained by exercising rights that were acquired under an ESS, is the date the rights were exercised.

    Example 13: CGT implications for non-qualifying shares

    Following on from example 2, Eliza sells her 800 shares on 10 November 2008 for $3 per share, incurring a $50 brokerage fee on the sale. A CGT event – A1 (disposal of CGT asset) – happens on the sale of Eliza’s shares.

    Eliza works out the cost base of her shares by including their market value on acquisition, $2,000 (800 shares x $2.50), and the $50 brokerage fee.

    Eliza’s capital gain is:

    Capital proceeds:
    800 shares $3

     


    $2,400

    less

    cost base:

     

     

    market value of the shares
    800 shares $2.50 

    brokerage fee


    $2,000

    $50




    $2,050

    Capital gain equals

     

    $350

    Eliza includes the capital gain of $350 in her assessable income in the year the CGT event A1 happened, which is the 2009 income year. Eliza cannot use the 50% discount method to calculate her net capital gain because she did not own the shares for at least 12 months.

    End of example

      

    Example 14: CGT implications for qualifying shares that are assessed upfront

    Following on from example 7, Peter sells his shares on 5 September 2008 for $5 per share, incurring a $50 brokerage fee on the sale. A CGT event – A1 (disposal of CGT asset) – happens on the sale of Peter’s shares.

    Peter works out the cost base of the shares by including their market value on acquisition, $1,000 (1,000 shares x $1), and the $50 brokerage fee.

    Peter’s capital gain is:

    capital proceeds
    1,000 shares $5

     


    $5,000

    less

    cost base

     

     

    market value of the shares
    1,000 shares $1 

    brokerage fee


    $1,000

    $50




    $1,050

    capital gain equals

     

    $3,950

    Peter includes the capital gain of $3,950 in his assessable income in the year the CGT event A1 happened, which is the 2009 year. Peter cannot use the 50% discount method to calculate his net capital gain because he did not own the shares for more than 12 months.

    End of example

      

    Example 15: CGT implications for rights that are assessed upfront and on the disposal of the underlying shares

    Following on from example 8, Shaun exercises his rights from United Power on 12 March 2009 and pays an exercise price of $2 per share to acquire 500 shares.

    A CGT event – C2 (cancellation, surrender or similar ending) – happens on the exercise of the United Power rights. However, under the CGT rules, the capital gain or capital loss is disregarded.

    On the same day, Shaun sells the United Power shares he acquired via the exercise of rights for $4 per share, incurring a $50 brokerage fee on the sale. A CGT event – A1 (disposal of a CGT asset) – happens when the shares are sold.

    Shaun works out the cost base of the shares acquired as a result of exercising the rights by including the market value of the rights on acquisition, $500 (500 rights x $1), the exercise price paid, $1,000 (500 rights x $2) and the $50 brokerage fee.

    Shaun’s capital gain is:

    capital proceeds
    500 shares $4

     


    $2,000

    less

    cost base

     

     

    market value of the rights
    500 rights $1 

    exercise price of the rights
    500 rights $2

    brokerage fee


    $500


    $1,000

    $50



    $1,550

    capital gain equals

     

    $450

    Shaun includes the capital gain of $450 in his assessable income for the 2009 year. Shaun cannot use the 50% discount method to calculate his net capital gain because he did not own the shares for at least 12 months.

    End of example

    CGT implications when disposing of shares or rights on which the discount was assessed at cessation time

    When you are assessed on the discount received on qualifying shares or rights at cessation time, whether there are any CGT implications when you dispose of the shares or rights (or the shares acquired via the exercise of the rights) will depend on how long you hold onto the shares or rights after the cessation time.

    The capital gain or loss is disregarded if, within 30 days of cessation time, the following CGT events happen (at arm’s length):

    • A1 (disposal of CGT asset)
    • C2 (cancellation, surrender or similar ending)
    • E1 (creating a trust over a CGT asset)
    • E2 (transferring a CGT asset to a trust)
    • E5 (beneficiary becoming entitled to a trust asset)
    • I1 (taxpayer stops being an Australian resident).

    The capital gain is disregarded because any change in value on the shares or rights is assessed as the discount at cessation time.

    If a CGT event happens to shares or rights after 30 days of the cessation time, you will need to account for any capital gain or loss. When calculating your capital gain or loss, you will need to include the market value of the shares or rights at cessation time as the first element of your cost base or reduced cost base.

    Example 16: CGT implications for qualifying shares disposed within 30 days of cessation time

    Following on from example 10, Joe sells his shares on 20 September 2007, five days after he has a cessation time. He receives $5 per share and incurs a brokerage fee of $50 on the sale.

    When Joe sells his shares, a CGT event – A1 (disposal of CGT asset) – happens. However, the capital gain or capital loss from the CGT event is disregarded because the sale of the shares happened within 30 days of the cessation time.

    End of example

      

    Example 17: CGT implications for qualifying rights and underlying shares not disposed of within 30 days of cessation time

    Following on from example 11, Margaret exercises 500 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.

    When Margaret exercises her rights, a CGT event – C2 (cancellation, surrender or similar ending) – happens on the exercise of the rights. However, under the CGT rules, the capital gain or capital loss is disregarded.

    Margaret sells the shares she acquires on 13 June 2008 for $18 per share, incurring a brokerage fee of $50 on the sale of the shares. A CGT event A1 (disposal of CGT asset) happens when Margaret sells her shares.

    Because Margaret did not dispose of the shares she acquired through the exercise of the rights within 30 days of the cessation time, she will need to calculate her CGT gain or loss.

    Margaret calculates her cost base for the shares by including their market value on the date she acquired them (which is the cessation time of the rights, being the day the rights are exercised). The market value at cessation time is $8,500 (500 shares x $17). The cost base also includes the brokerage fee of $50.

    Margaret’s capital gain is:

    capital proceeds
    500 shares $18

     

     
    $9,000

    Less

     

     

    cost base

    market value of the shares
    500 shares $17

     


    $8,500

     

    brokerage fee

    $50

    $8,550

    capital gain equals

     

    $450

    Margaret includes the capital gain in her assessable income in the year the CGT event A1 happened, the 2008 income year. Margaret cannot use the 50% CGT discount to calculate her net capital gain because she did not own the shares for at least 12 months.

    End of example

    Stapled securities and rights to acquire them

    Stapled securities are created when two or more different securities are contractually bound together so they cannot be sold separately. Many different types of securities can be stapled together. A common example of a stapled security is when a share in a company is stapled to a unit in a finance trust.

    Tax implications of acquiring stapled securities (or rights to acquire them) from an employee share scheme

    If you acquire stapled securities, or rights to acquire stapled securities, the employee share scheme rules in Division 13A will assess any discount you receive on the stapled securities or rights to acquire stapled securities if all of the following requirements are satisfied:

    • you acquire the stapled securities, or the rights to acquire stapled securities, on or after 1 July 2006, in respect of your employment
    • each stapled security includes one ordinary share in a company, and one or more interests in a company or unit trust
    • the stapled securities are listed for quotation on the official list of the Australian Securities Exchange as a stapled security
    • the stapled securities, or the rights to acquire stapled securities, meet the qualifying conditions in Division 13A.

    If you satisfy these requirements, Division 13A will apply to the stapled securities, or rights to acquire stapled securities, in the same way as it applies to qualifying shares and rights acquired from employee share schemes. This means that you may be entitled to use the tax concessions available under Division 13A. Refer to Tax concessions available for qualifying shares and rights for more information about the concessions.

    However, there are some modifications to the qualifying conditions and cessation times for stapled securities and rights to acquire stapled securities. These modifications are further explained below.

    Attention

    If your stapled securities, or rights to acquire stapled securities, do not satisfy all of the above requirements, the individual interests of the stapled securities are treated separately for tax purposes.

    End of attention

    Example 18: Non-qualifying stapled securities acquired from an employee share scheme

    Ramon acquires 300 stapled securities for free from his employer ABC Co. Each stapled security consists of ordinary shares in ABC Co, and units in the ABC Unit Trust. The stapled securities do not meet the qualifying conditions in Division 13A because Ramon holds more than 5% of the ordinary shares in ABC Co.

    Because the stapled securities do not meet the qualifying conditions, Division 13A will not apply to the stapled securities as a whole. Instead, Division 13A will only assess the discount received on the ordinary share component of the stapled securities. The units in the unit trust will be assessable under other provisions of the income tax law.

    End of example

    Qualifying stapled security or a qualifying right to acquire a stapled security

    The qualifying conditions that apply to shares or rights acquired from an employee share scheme also apply to stapled securities and rights to acquire stapled securities. Refer to Qualifying shares or rights for a list of these conditions.

    However, because stapled securities, and rights to acquire stapled securities, can consist of shares or units in different entities, the following qualifying conditions have been modified:

    • the requirement that at least 75% of the permanent employees of the employer had been entitled to participate in an employee share scheme is modified so that it only applies to the stapled entity that is your employer, rather than to all of the stapled entities
    • the requirement that you do not hold more than 5% legal or beneficial interest in the company is modified so that it is satisfied if you do not hold more than 5% of the shares in any company that is a stapled entity, and more than 5% of the units in any unit trust that is a stapled entity of the stapled security
    • the requirement that you do not control more than 5% of the voting rights in the company is modified so that it only applies to your interests in the companies with ordinary shares that form part of the stapled security.

    Example 19: Modifications to qualifying conditions

    Megan, an employee of Apco Limited, acquires 1,000 stapled securities for free in relation to her employment. Each stapled security comprises an ordinary share in Apco Limited and a unit in the Apco Trust.

    80% of Apco Limited’s permanent employees have been entitled to participate in an employee share scheme run by the company. In contrast, only 40% of the permanent employees of the trustee of the Apco Trust have been entitled to participate in an employee share scheme.

    As an employee of Apco Limited, Megan will satisfy the requirement that at least 75% of employees of her employer were entitled to participate in an employee share scheme.

    However, if Megan were an employee of the trustee of the Apco Trust, her stapled securities would not be qualifying because less than 75% of the trustee’s employees have been entitled to participate in an employee share scheme.

    End of example

    Cessation time for stapled securities or rights to acquire them

    The events that trigger a cessation time for qualifying shares and rights also apply to stapled securities and rights to acquire stapled securities. Refer to Cessation time for a list of the events that can trigger a cessation time.

    In addition, stapled securities and rights to acquire stapled securities have two more events that will trigger a cessation time:

    • when any part of the stapled security ceases to be stapled together
    • when the stapled security ceases to be listed for quotation on the official list of the Australian Securities Exchange as a stapled security.

    CGT implications when disposing of stapled securities or rights acquired from an employee share scheme

    The CGT rules that apply to qualifying shares and rights also apply to each CGT asset in a stapled security. However, the CGT implications will vary, depending on the CGT event that occurs and whether you have been assessed on the discount from your stapled securities or rights upfront, or have deferred assessing the discount until a cessation time occurs. Refer to Disposing of shares or rights for more information.

    For stapled securities or rights to acquire stapled securities that are not assessed under Division 13A, capital gains and losses are determined separately for each security stapled together. Refer to our fact sheet Stapled securities and capital gains tax for more information.

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      Last modified: 01 Jul 2015QC 16652