• ESS – Market value of listed shares and stapled securities

    This information will help you calculate the market value of listed shares and stapled securities acquired by an employee under an employee share scheme (ESS) after 30 June 2009, in particular circumstances.

    This information applies to:

    • shares
    • stapled securities
    • qualifying shares acquired by an employee before 1 July 2009 if
      • the employee did not elect to be taxed in the year when the shares were acquired
      • a cessation time has not happened to the shares before 1 July 2009.
       

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    Market value

    The rules in Division 83A of the Income Tax Assessment Act 1997, which deal with ESS interests acquired under an ESS, do not define market value – nor do they prescribe any method for determining the market value of a listed share acquired under an ESS.

    Market value is therefore given its ordinary meaning. The increased flexibility that this provides means taxpayers are able to choose a valuation methodology that fits their circumstances and has the lowest compliance costs.

    We will accept any reasonable method for determining the market value of listed shares in particular circumstances.

    The following information provides examples of valuation methods for particular circumstances that we consider reasonable.

    Valuation methods

    A listed share is registered on a recognised exchange such as the Australian Securities Exchange (ASX).

    As listed shares are commonly traded on a daily basis, you may be able to rely on the appropriate share market as the source for valuing a listed share.

    When you value a listed share, we would expect you to take into account a number of factors in addition to the listed price. These are:

    • liquidity
    • volatility
    • valuation changes resulting from company capital structural events or changes in retained earnings (for example, as a result of dividend payments)
    • the period to which the valuation applied.

    Former Division 13A of Part III of the Income Tax Assessment Act 1936 (the former ESS rules) prescribed a number of methods for valuing listed shares. It is reasonable to use these methods for valuing listed shares.

    Weighted average actual price

    The most common method for valuing listed shares under the former ESS rules was to use the weighted average actual price that the shares were traded on that stock market during a week.

    The market value on a particular day is the weighted average of the actual prices at which those shares were traded, on a particular stock market, during the one week period up to and including that day, where:

    • a share is quoted on the stock market of an approved stock exchange on that day
    • there is at least one transaction in shares of that class during the one week period up to and including that day.

    Example: Weighted average actual price

    Calculating the market value of Happy Ltd shares for Wednesday 7 May.

    The market value will be the weighted average actual price of Happy Ltd's shares traded on the stock exchange for the five trading days in the week from Thursday 1 May to Wednesday 7 May inclusive.

    An enquiry of the stock exchange reveals 52,000 Happy Ltd shares were traded over these five days, at the following actual prices:

    • 4,000 shares @ $2.20
    • 10,000 shares @ $2.35
    • 8,000 shares @ $2.20
    • 30,000 shares @ $2.40

    The weighted average actual price is calculated as follows:

    (((4,000 + 8,000) x $2.20) + (10,000 x $2.35) + (30,000 x $2.40))
    (4,000 + 10,000 + 8,000 + 30,000)

    = $121,900
    52,000

    = $2.34

    The market value of Happy Ltd's shares on Wednesday 7 May is $2.34.

    End of example

    Particular circumstances and recommended methods

    Depending on the particular circumstances and the costs involved, it may be more convenient and cost effective to use a method other than the weighted average actual price.

    For each of the following circumstances we have provided an example of another method for calculating the market value that we also consider reasonable for that particular circumstance.

    Shares purchased on-market by a trustee or administrator using amounts contributed by an employee or employer

    The employee's contribution can be paid from previously taxed income or through an effective salary sacrifice arrangement.

    Shares may be purchased at various prices over a number of days by a trustee or administrator who then allocates the shares to all participating employees on a particular day, at which time the shares are acquired by the employee.

    A reasonable method for determining market value on the day of acquisition would be the average cost of the shares. This would be acceptable provided that the shares were purchased and allocated within five trading days.

    However, if the shares were purchased continuously over a period (up to 30 days) so as not to distort the market price, it is still acceptable to use the average cost of shares method.

    Example: Average cost of shares

    The trustee of the Sunny Ltd Employee Share Trust purchases a total of 100,000 shares in Sunny Ltd to allocate to participants in the Sunny Ltd ESS during the period 6 May to 9 May. The total cost of the shares (excluding brokerage) is $407,000.

    The trustee allocates the shares to the participants according to the ESS rules on 10 May.

    The market value of each share acquired under the plan is $4.07.

    End of example

    New shares issued to an employee or issued to a trustee to hold on behalf of an employee

    New shares may be issued to an employee on a particular day or shares may be issued to a trustee and subsequently allocated to an employee on a particular day.

    A reasonable method for determining the market value of newly issued shares on the particular day the shares were issued is to use the 'weighted average closing price' based on the closing market prices over the five trading days before, but not including, the particular day.

    Basing the calculation on closing prices rather than actual prices, and only on the five trading days before the particular day enables the employer to:

    • know the market value before issue
    • reduce the cost of working out the market value of newly issued shares.

    Example: Weighted average closing price (previous five trading days)

    Snowy Ltd issues new shares to participants in its ESS on Monday 10 October.

    The number of shares traded in Snowy Ltd and closing prices for each of the five trading days before 10 October were as follows:

    Date

    Number of shares traded

    Closing price

    3 October

    60,000

    $4.10

    4 October

    20,000

    $4.10

    5 October

    80,000

    $4.10

    6 October

    40,000

    $4.00

    7 October

    40,000

    $3.90

    The weighted average closing price is calculated as follows:

    (((60,000 + 20,000 + 80,000) x $4.10) + (40,000 x $4.00) + (40,000 x $3.90))
    (60,000 + 20,000 + 80,000 + 40,000 + 40,000)

    $972,000
    240,000

    = $4.05

    The market value of Snowy Ltd shares issued to participants on 10 October is $4.05.

    End of example

    Shares forfeited to a trustee and later allocated to an employee

    Under the conditions of some ESSs, where shares are allocated to an employee by the trustee or administrator of the ESS, they may be subsequently forfeited. In this case, they will revert to the trustee or administrator of the ESS.

    If those same shares are then reallocated to an employee on a particular day (the employee's date of acquisition), a reasonable method for determining their market value on the particular day is the weighted average closing price calculated over the five trading days before, but not including, the particular day.

    It is also reasonable to calculate the 'weighted average closing price' using the closing market prices over the five trading days up to and including the particular day.

    Example: Weighted average closing price (five trading days including particular day)

    The administrator of the Butterfly Bags Ltd ESS allocates shares to participants in its ESS on 12 March. In accordance with the ESS rules, a number of participants subsequently forfeited their shares to the administrator. On Thursday 12 September the administrator reallocated those same shares to participants in accordance with the ESS rules.

    The number of shares traded in Butterfly Bags Ltd and closing prices for each of the five trading days up to and including 12 September were as follows:

    Date

    Number of shares traded

    Closing price

    6 September

    15,000

    $3.10

    9 September

    27,000

    $3.19

    10 September

    22,000

    $3.18

    11 September

    18,000

    $3.18

    12 September

    25,000

    $3.22

    The weighted average closing price is calculated as follows:

    ((15,000 x $3.10) + (27,000 x $3.19) + ((22,000 + 18,000 x $3.18)) + (25,000 x $3.22))
    (15,000 + 27,000 + 22,000 + 18,000 + 25,000)

    $340,330
    107,000

    = $3.18

    The market value of Butterfly Bags Ltd shares issued to participants on 12 September is $3.18.

    End of example

    New shares acquired via a public float

    New shares are issued to employees as part of a public float or issued to a trustee and subsequently allocated to an employee on a particular day.

    A reasonable price to use as market value of the shares on the particular day is the retail offer price, provided that the particular day was within five days either side of the shares being issued under the float.

    Shares acquired under a public offer

    Shares are issued to employees as part of a public offer or are issued to a trustee and subsequently allocated to an employee on a particular day.

    A reasonable method for determining the market value on the particular day is the retail offer price.

    Shares valued at the deferred taxing point

    Where shares are acquired under an ESS, they are assessable at a deferred taxing point if:

    • for shares acquired after 30 June 2009, they were not subject to taxation at acquisition or
    • for qualifying shares acquired before 1 July 2009
      • the employee did not elect to be taxed in the year when the shares were acquired
      • a cessation time has not happened to these shares before 1 July 2009.
       

    Where shares are sold on-market within 30 days of the deferred taxing point, the taxing point will be moved to the date of sale, and the sale proceeds from the shares can be taken as their market value.

    For shares that are not sold within 30 days of the deferred taxing point, their market value is the weighted average closing price for the five trading days before, but not including, the date of the deferred taxing point. It is also reasonable to calculate the 'weighted average closing price' using the closing market prices over the five trading days up to and including the particular day.

    Example: Weighted average closing price (five previous trading days)

    Paul is an employee of Sneezy Ltd and participates in the Sneezy Ltd ESS. Paul's ESS shares are at real risk of forfeiture and are subject to deferred taxation. The deferred taxing point for Paul's ESS shares is Monday 17 May. Paul has not sold his shares within 30 days of the deferred taxing point.

    The number of shares traded in Sneezy Ltd and closing prices for each of the five trading days before 17 May were as follows:

    Date

    Number of shares traded

    Closing price

    10 May

    50,000

    $4.10

    11 May

    30,000

    $4.20

    12 May

    70,000

    $4.10

    13 May

    40,000

    $4.00

    14 May

    30,000

    $3.90

    The weighted average closing price is calculated as follows:

    ((50,000 + 70,000) x $4.10)) + (30,000 x $4.20) + (40,000 x $4.00) + (30,000 x $3.90)
    (50,000 + 30,000 + 70,000 + 40,000 + 30,000)

    $895,000
    220,000

    = $4.06

    The market value of Sneezy Ltd shares at Paul's deferred taxing point on 17 May is $4.06.

    However, in circumstances where a stock is relatively liquid and does not exhibit significant price volatility, it is reasonable to use the closing price of the particular stock as the market value on the day of the deferred taxing point.

    Example: Market value on the day of the deferred taxing point

    Carol is an employee of Sleepy Bank Ltd and participates in the Sleepy Bank Ltd ESS. Carol's ESS shares are at real risk of forfeiture and are subject to deferred taxation. The deferred taxing point for her ESS shares is Thursday 23 August. Carol has not sold her shares within 30 days of the deferred taxing point.

    Sleepy Bank Ltd shares are heavily traded on a daily basis and exhibit very low price volatility.

    On Thursday 23 August there were 2,150,000 shares in Sleepy Bank Ltd traded on the stock exchange and the closing price was $2.88.

    The market value of Sleepy Bank Ltd shares at Carol's deferred taxing point is $2.88.

    End of example

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      Last modified: 07 Feb 2017QC 27239