Valuation shortcut 4
Employee share interests
Shares and stapled securities issued under an employee share scheme (ESS interests) that represent 1% or less of the membership interests in an entity are disregarded for the purposes of determining whether an entity is wholly owned. However, the head company still uses their market value to calculate its allocable cost amount for membership interests in the joining entity.
The availability of this shortcut option acknowledges that valuing minority interests is a difficult and complex process.
Where an employee, under the former Division 13A of the ITAA 1936, holds shares or stapled securities, those interests will have been market valued where either of the following applies – the employee has:
- elected to have the discount given in relation to their acquisition of the ESS interests included in their assessable income at the time they were acquired
- not elected to have the discount included in their assessable income but the cessation time has occurred and the employee continues to hold the shares.
This also applies where the employee has previously held rights and has exercised those rights, and now holds shares or stapled securities.
For employers providing ESS interests to their employees after 30 June 2009, Division 392 of the TAA requires employers to report the discount they give in relation to those interests to us by 14 July after the end of the financial year in which they are provided. In order to meet their reporting requirements, employers will need to have market valued the ESS interests.
The valuation shortcut operates as follows.
The head company may rely on these existing market valuations when calculating the employee share interest component of the allocable cost amount for the joining entity, provided for ESS interests acquired either:
- before 1 July 2009, the valuation was for the purposes of Division 13A in accordance with the former sections 139FB, 139FD and, in the case of rights, 139FE of the ITAA 1936
- after 30 June 2009, the valuation was for the purposes of Division 83A in accordance with Subdivision 960-S of the ITAA 1997, in accordance with any method specified by regulation in the Income Tax Assessment Regulations 1997, or (from 1 July 2015) using any method approved by legislative instrument in accordance with section 960-412 of the ITAA 1997, and the
- original market valuations were appropriately documented
- decision to use the existing market valuations is documented and, they are, if necessary, updated in accordance with the requirements set out under 'Use of existing valuations'.