ESS – Market value of unlisted rights to acquire listed shares and stapled securities
This document will help you to calculate the market value of unlisted rights (including options) to acquire listed shares and stapled securities, where those rights are acquired by an employee under an employee share scheme (ESS) after 30 June 2009.
An unlisted right is a right that is not quoted on an approved stock exchange, such as the Australian Securities Exchange (ASX).
When we refer to 'unlisted rights to acquire shares' in this document we also mean 'unlisted rights to acquire stapled securities'.
This document also applies to qualifying rights acquired by an employee before 1 July 2009 if:
- the employee did not elect to be taxed in the year when the rights were acquired
- a cessation time has not happened to the rights before 1 July 2009.
See also:
Working out market value
The rules in Division 83A of the Income Tax Assessment Act 1997 do not define the market value of an ESS interest.
Under the Income Tax Assessment Regulations 1997, for unlisted rights that must be exercised within 15 years of acquisition (10 years if they had a taxing point before 1 July 2015), an employee can choose to value them at either:
- the market value according to its ordinary meaning
- the amount determined by application of the regulations.
However, an employee must use the ordinary meaning of market value if the deferred taxing point occurs either on the day the employee disposes of:
- the right (other than by exercising it)
- the share acquired from exercise of the right.
Where the disposal of the right or share is an arm's-length disposal, the amount received on disposal of the share or right will generally be taken to be the market value – for example, where the share is sold on market.
When an employee chooses to use the value determined by using the regulations, the value will be the greater of:
- the market value of the share on the day that the employee may acquire it by exercising the right, less the lowest amount that the employee must pay to exercise the right to acquire the beneficial interest in the share (that is, the intrinsic value)
- the value determined according to the calculation tables in the regulations. If the exercise price is nil or cannot be determined, then the value of the right is equal to the market value of the underlying share on that day.
Example: Market value determined by regulations
Barry is an employee of XYZ Ltd. Barry is a participant in XYZ Ltd's tax-deferred ESS.
On 29 March 2014, Barry is granted 200,000 unlisted rights to purchase shares in XYZ Ltd under the ESS. He is restricted from selling the rights, or the shares he will acquire if he exercises the rights, until 29 March 2018.
The rights have an exercise price of 10 cents and will lapse after seven years, on 29 March 2021.
On 29 March 2017, Barry ceases his employment with XYZ Ltd but he is allowed to keep his rights.
Barry's deferred taxing point occurs when he ceases employment. At this time, the underlying shares in XYZ Ltd have a market value of 12 cents. Barry does not exercise his rights at this time. Barry has four years left to exercise his rights before they will lapse.
Barry chooses to value the rights in accordance with the regulations.
The market value of Barry's rights on 29 March 2017 is the greater of:
- the right's intrinsic value, and
- the value according to the regulations.
Calculating the right's intrinsic value
The Intrinsic value equals the current market value of the underlying share less the exercise price of the unlisted right.
12 cents − 10 cents = 2 cents
Calculating the value according to the regulations
The calculation percentage equals:
(A ÷ B) × 100%
Where:
A is market value, on the particular day, of the share that is subject of the right
B is amount, or lowest amount, that must be paid to exercise the right
(12 cents ÷ 10 cents) × 100 = 120%
As the calculation percentage is equal to, or greater than, 110%, Barry uses the figures in table 2 of the regulations.
Base percentage and additional percentage
The exercise period is 48 months (four years). When the period falls into two ranges in the calculation table, use the lower range. Here Barry uses 36 to 48 months, rather than 48 to 60 months.
Exercise period
|
Base percentage
|
Additional percentage
|
36 to 48
|
11.4%
|
0.8%
|
From the table, the base percentage is 11.4% and the additional percentage is 0.8%.
Excess
Calculate the excess, which is the amount by which the calculation percentage exceeds 110%, as follows:
Excess = 100 multiplied by (calculation percentage less 110%)
= 100 × (120% − 110%)
= 10
Market value
Calculate the market value using the following formula:
Amount or lowest amount that must be paid to exercise the right multiplied by [base percentage plus (excess multiplied by additional percentage)]
= 10 cents x ((11.4% + (10 − 0.8%))
= 10 cents × (11.4% + 8%)
= 10 cents − 19.4%
= 1.94 cents
The value according to the regulations (1.94 cents) is less than the right's intrinsic value (2 cents).
Therefore, the market value of the right is 2 cents.
The market value of Barry's 200,000 rights on 29 March 2017 is $4,000.
End of exampleMarket value according to its ordinary meaning
The market value according to its ordinary meaning must be determined if either:
- an unlisted right has an exercise period greater than 15 years (10 years for those with a taxing point before 1 July 2015)
- an employee chooses not to use the amount determined by the application of the regulations for valuing unlisted rights.
Any method used to determine the market value should have regard to the terms and conditions which apply to the right being valued. However, in working out the market value of the right you must disregard anything which would prevent or restrict conversion of the right to money.
For example, where the terms of an ESS impose disposal restrictions or provide for rights to be forfeited in particular circumstances, these factors should be disregarded when determining the market value.
See also:
Guidance on calculating the market value of unlisted rights over listed shares and stapled securities, acquired by an employee under an employee share scheme.