Employee share schemes (ESS) give employees benefits such as shares or the opportunity to buy shares or rights (including options) in the company they work for at a discounted price. These benefits are known as ESS interests. In most cases, ESS interests are exempt from CGT implications until the discount on the ESS interest has been taxed. When you sell your ESS interests (or resulting shares), they are taxed under the CGT rules (or if you are a share trader, the trading stock rules).
CGT implications for employee shares and rights under a corporate restructure
If employee shares or rights are exchanged for replacement shares or rights in a new company under a corporate restructure that happened on or after 1 July 2004, a rollover may be available so that there is no taxing point under the ESS tax rules. Corporate restructures affected include mergers, demergers (in limited circumstances) and 100% takeovers. Any capital gain or capital loss made on the employee shares or rights because of the restructure will be disregarded where this rollover applies.
Changing residence or working in multiple countries
There are specific CGT rules relating to ESS shares or rights held by employees who become, or cease to be, Australian residents. There are also specific rules for temporary residents.
Modified CGT treatment applies to your shares in an ESIC, depending on how long you hold the shares before a CGT event happens to them (such as the sale of the shares) and whether you make a capital gain or capital loss from the CGT event.
However, if you invest more than $50,000 in ESICs in an income year and do not meet the sophisticated investor requirements, you will not be eligible for modified CGT treatment on any of the shares acquired in that income year.
Shares held for
Modified CGT treatment
Less than 12 months
Any capital gain you make from a CGT event is not disregarded.
You must disregard any capital loss you make from a CGT event that happens to the shares during this period.
12 months or more but less than 10 years
A capital gain or capital loss that you made from a CGT event happening to the shares is disregarded.
10 years or more
The first element of the cost base and reduced cost base for the share will become its market value on the tenth anniversary of the share being issued to you. This means that you will recognise any capital gains or losses that happen from this point in time.
If a CGT roll-over applies
Generally, special rules apply to preserve the modified CGT treatment for eligible shares in an ESIC that are subject to a CGT roll-over. However, the modified CGT treatment does not apply if the scrip for scrip rollover or wholly-owned company rollover applies to your ESIC shares.
Venture capital investment
Venture capital investors typically invest in a VCLP, an ESVCLP or an AFOF to diversify their portfolio of venture capital assets. A VCLP, ESVCLP or an AFOF is an intermediary that invests in shares and units and it is taxed on a 'flow through' basis.
The partners of a VCLP, an ESVCLP or an AFOF make a capital gain or capital loss from a CGT event relating to those shares and units, not the VCLP, the ESVCLP or the AFOF itself. For CGT purposes, each partner owns a proportion of each share or unit and calculates a capital gain or capital loss on their share of each share or unit. A capital gain or capital loss on your share of each share or unit may be disregarded.
Carried interest (CGT event K9)
The carried interest of a general partner is the partner's entitlement to a distribution from the VCLP, the ESVCLP or the AFOF, normally contingent on profits attained for the limited partners in a VCLP, the ESVCLP or the AFOF. You have a capital gain when you become entitled to receive a payment of a carried interest under CGT event K9.
You may need to adjust the cost base of shares or units for CGT calculations if you receive a non-assessable payment without disposing of your shares or units. A payment or distribution can include money and property.
The amount of the non-assessable payment is adjusted to exclude certain amounts relating to a VCLP, an ESVCLP, an AFOF and an ESIC.
You need to keep accurate records of the amount and date of any non-assessable payments on your shares and units.
Non-assessable payments after a recent restructure
As a result of some stapling arrangements, some investors in managed funds have received units which have a very low cost base. The payment of certain non-assessable amounts in excess of the cost base of the units will result in these investors making a capital gain.
Non-assessable payments from a company (CGT event G1)
Non-assessable payments to shareholders are not very common and would generally be made only if a company has shareholder approval to reduce its share capital. If you receive a non-assessable payment from a company (that is, a payment that is not a dividend or an amount that is taken to be a dividend for tax purposes), you need to adjust the cost base of the shares at the time of the payment. These payments will often be referred to as a return of capital. If the amount of the non-assessable payment is not more than the cost base of the shares at the time of payment, you reduce the cost base and reduced cost base by the amount of the payment.
You make a capital gain if the amount of the non-assessable payment is more than the cost base of the shares. The amount of the capital gain is equal to the excess. If you make a capital gain, you reduce the cost base and reduced cost base of the shares to nil. You cannot make a capital loss from the receipt of a non-assessable payment.
Interim liquidation distributions that are not dividends can be treated in the same way as other non-assessable payments under CGT event G1.
The exception is if the payment is made to you by a liquidator after the declaration and the company is dissolved within 18 months of such a payment. In this case, you include the payment as capital proceeds on the cancellation of your shares (rather than you making a capital gain at the time of the payment). In preparing your tax return, you may delay declaring any capital gain until your shares are cancelled unless you are advised by the liquidator in writing that the company will not cease to exist within 18 months of you receiving the payment.
Example 45: Non-assessable payments
Rob bought 1,500 shares in RAP Ltd on 1 July 1994 for $5 each, including brokerage and stamp duty. On 30 November 2007, as part of a shareholder-approved scheme for the reduction of RAP Ltd’s share capital, he received a non-assessable payment of 50 cents per share. Just before Rob received the payment, the cost base of each share (without indexation) was $5.
As the amount of the payment is not more than the cost base (without indexation), he reduces the cost base of each share at 30 November 2007 by the amount of the payment to $4.50 ($5.00 − 50 cents). As Rob has chosen not to index the cost base, he can claim the CGT discount if he disposes of the shares in the future.End of example
Non-assessable payments from a unit trust (CGT event E4 or E10)
Unit trusts often make non-assessable payments to unit holders. Your CGT obligations in this situation are explained in Trust non-assessable payments (CGT event E4).
For units you sold, you must adjust their cost base and reduced cost base. The amount of the adjustment is based on the total of the non-assessable payments you received during 2020–21 up to the date of sale. You use the adjusted cost base and reduced cost base to work out your capital gain or capital loss.
If the unit or interest is not in an AMIT, the CGT event is E4, and if the unit or interest is in an AMIT, the CGT event is E10.
Non-assessable payments under a demerger
If you received a non-assessable payment under an eligible demerger, you do not adjust the cost base and the reduced cost base of your shares or units. Instead, you adjust your cost base and reduced cost base under the demerger rules. You may have made a capital gain on the non-assessable payment if it exceeded the cost base of your original shares or units, although you are able to choose a CGT rollover.
An eligible demerger is one that happened on or after 1 July 2002 and satisfies certain tests. The head entity will normally advise shareholders or unit holders if this is the case.