Some companies encourage employees to participate in employee share schemes by offering them discounted shares or rights (including options) to acquire shares. Where the scheme complies with the employee share scheme income tax rules (ESS rules), an employee can choose when they include the discount given on the shares or rights in their assessable income.
The employee includes the discount in their assessable income:
- in the income year they acquire shares or rights, if the employee makes an election under the ESS rules. The discount is calculated at the date the shares or rights were acquired, or
- in the income year that cessation time of the shares or rights occurs. For shares, this is usually the earlier of employment ceasing or when the disposal restrictions cease and forfeiture conditions expire on the shares. For rights, this is usually the earlier of employment ceasing or the exercise of the rights to acquire the shares. The discount is calculated at the date of cessation time.
The first element of the cost base of the shares or rights (or any shares acquired as a result of exercise of the rights) is their market value (as determined under the ESS rules) at the date the discount was calculated. If a CGT event happens in relation to the shares or rights, the capital gain or capital loss is calculated under the rules that apply to that event.
If an arm's length CGT event A1 (sale or disposal of a CGT asset) happens, or a CGT event E1, E2 or E5 (implications of shares or rights acquired by a trustee) happens, in relation to the shares or rights (or any shares acquired as a result of exercise of the rights) within 30 days of cessation time, the capital gain or capital loss is disregarded.
For more information, refer to ESS interests with a taxing point before 1 July 2009.
Example: Employee share plans
Manfred has been employed by MegaCorp Ltd for 13 years. Along with other employees who have been with the company for more than five years, he has been invited to participate in the company's employee share scheme. He is offered 100 shares for each year of service.
Manfred agrees to participate and is required to pay $1 per share, a total of $1,300. In addition, the company informs Manfred that he must include $325 in his taxable income as the amount of the discount on allotment of the shares. The cost base of the shares for CGT purposes is therefore a total of $1,625 ($ 1,300 + $325) or $1.25 per share.
End of example