• 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:

    (160,000 x $4.10) + (40,000 x $4.00) + (40,000 x $3.90)
    240,000

    $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.

      Last modified: 01 Jul 2015QC 27239