• Terms we use

    Frequently used terms in this document

    Term

    Definition

    Aggregated turnover

    Aggregated turnover is your annual turnover plus the annual turnovers of any business entities that are your affiliates or that are connected with you.

    Associates

    Associates of an individual include people and entities such as relatives, or closely connected companies or trustees of a trust (other than the trustee of an employee share trust). For example, a partner in a partnership is an associate of the partnership and an individual's spouse is an associate of the individual. An individual may also be an associate of a self-managed super fund in which they are a member or of a family trust of which they are a beneficiary.

    Capital gains tax

    Capital gains tax (CGT) is the tax paid on a capital gain. It is not a separate tax, just part of a taxpayer’s income tax. The most common way to make a capital gain (or capital loss) is by selling or disposing of assets such as real estate, shares or managed fund investments.

    Cost base

    The cost base of an asset is generally what it costs you. It is made up of five elements:

    • the money you paid or property you gave for the asset
    • the incidental costs of acquiring or selling it (for example, brokerage and stamp duty)
    • costs of owning it (generally this will not apply to shares or units because you will usually have claimed or be entitled to claim these costs as tax deductions)
    • costs associated with increasing or preserving its value, or with installing or moving it
    • the cost to you to preserve or defend your title or rights to it – for example, if you paid a call on shares.

    The cost base for a share or unit may need to be reduced by the amount of any non-assessable payment you receive from the company or fund.

    Cost base is also explained in Subdivision 110-A of the Income Tax Assessment Act 1997.

    Discount

    If an employee acquires ESS interests under a taxed-upfront scheme, the discount is the market value of the ESS interests at acquisition, reduced by the amount paid to acquire the interests.

    If an employee acquires ESS interests under a tax-deferred scheme, the discount is the market value of the ESS interests at the deferred taxing point, reduced by the cost base of the interests.

    Employees

    Employees can include current, past or prospective employees and their associates. For the purposes of the ESS rules, directors and independent contractors are also treated as employees.

    Employee share scheme (ESS)

    An employee share scheme is a scheme under which ESS interests in a company are provided to its employees (including current, past or prospective employees and their associates) in relation to their employment.

    ESS annual report

    The report that an employer provides to us (the ATO) with information on discounts that employees or their associates have received on ESS interests either directly or through an employee share trust.

    ESS interests

    Shares, stapled securities, or rights (including options) to acquire shares or stapled securities

    ESS statement

    The statement that an employer gives an employee with information about any discounts the employee or their associates have received on ESS interests. It contains information needed to complete the employee’s tax return.

    Exercise the right

    This is a term used in the industry that means to use or convert the right you have to a share in the company.

    Indeterminate right

    A right to acquire at a future time either:

    • shares or cash (at the discretion of the employer)
    • a number of shares, where that number cannot be determined at the time of acquisition of the right but will be determined at a later time.
     

    Option

    An option is a form of right that gives the holder the right, but not the obligation, to buy a share in the company for an agreed price (the exercise price) by exercising their option during a certain time period.

    Previous law

    Division 13A of Part III of the Income Tax Assessment Act 1936, which provided for the taxation treatment of shares or rights acquired under employee share schemes before 1 July 2009.

    Real risk of forfeiture

    An ESS interest acquired by an employee is at real risk of forfeiture if a reasonable person would consider that there is a real risk that the employee may forfeit or lose the ESS interest, other than by intentionally taking no action to realise the benefit.

    The meaning of 'real' is something more than a mere possibility.

    Reportable fringe benefits

    Benefits an employer gives their employee because of their employment (other than salary and wages) are included as fringe benefits, even if the employer actually provides them to an associate of the employee. The grossed-up taxable value of those benefits that the employer records on their employee's payment summary for the income year that corresponds to the employer’s FBT year is their reportable fringe benefits amount.

    The reportable fringe benefits total is the sum of the reportable fringe benefits amounts from different employers.

    Reportable superannuation contributions

    Your reportable superannuation contributions are the sum of the following:

    • any personal deductible contributions you may have made
    • any reportable employer super contributions your employer may make for you.
     

    Salary sacrifice arrangements

    An arrangement where an ESS interest is provided either:

    • because the employee agreed to acquire the ESS interest in return for a reduction in salary or wages that would not have happened apart from the agreement
    • as part of the employee's remuneration package, in circumstances when it is reasonable to conclude that the employee's salary or wages would be greater if the ESS interest was not part of that package.

    ESS interests acquired under salary sacrifice arrangements are treated as acquired at a discount. The amount of the reduction in salary or wages under the salary sacrifice arrangement does not form part of the cost base of the ESS interests.

    Start-up company

    For ESS purposes, a company is a start-up for an income year if, at the end of its most recent income year before the ESS interest was acquired in it:

    • the company and any subsidiaries or its holding company and any subsidiaries  
      • were not listed on a stock exchange
      • had been incorporated for less than 10 years
       
    • the company's aggregated turnover did not exceed $50 million.
     

    Start-up concession

    A concession available to an employee with ESS interests in a start-up company provided that

    • the scheme meets certain conditions
    • the employer (which may or may not be the company issuing the ESS interest) is an Australian resident company
    • the employee meets the 10% ownership and voting rights test
    • the discount on an ESS interest that is a share is no more than 15% of its market value at the time it is acquired
    • the amount payable to exercise an ESS interest that is a right is greater than or equal to the market value of an ordinary share in the company when the right is acquired.

     

    The 5% ownership and voting rights test

    This test applies to all ESS concessional schemes where the ESS interests were acquired before 1 July 2015. After acquiring their ESS interests, the employee must not:

    • hold more than 5% ownership of the company, or
    • control more than 5% of the voting rights in the company.

    The employee’s ownership and voting rights include the ownership and ownership and voting rights of their associates.

    This test does not include the ownership of shares or the voting rights the employee would have if they were to exercise any ESS interests they hold that are rights.

    The 10% ownership and voting rights test

    This test applies to all ESS concessional schemes where the ESS interests were acquired after 30 June 2015. After acquiring their ESS interests, the employee must not:

    • hold more than 10% ownership of the company, or
    • control more than 10% of the voting rights in the company.

    The employee’s ownership and voting rights include the:

    • ownership and voting rights of their associates
    • ownership of shares and the voting rights they would have if they were to exercise any ESS interests they hold that are rights. 
     

    Taxable income

    Assessable income less allowable deductions

    Taxable income after adjustments

    An employee's taxable income after adjustments for the year is the sum of their:

     

    Total net investment loss

    An employee's total net investment loss is the sum of:

    • the amount that the employee's deductions from financial investments are greater than their income from those investments for the income year
    • the amount that the employee's rental property deductions are greater than their rental property income, for the income year.
     
    Last modified: 21 Dec 2015QC 47620