Senate

Taxation Laws Amendment Bill (No. 2) 1995

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Ralph Willis, MP)
THIS MEMORANDUM TAKES ACCOUNT OF AMENDMENTS MADE BY THE HOUSE OF REPRESENTATIVES TO THE BILL AS INTRODUCED

CHAPTER 2 - Employee share schemes

Overview

2.1 Schedule 2 of the Bill amends the Income Tax Assessment Act 1936 (ITAA) to provide a new regime for the taxation of benefits provided to employees under an employee share scheme. The new regime will replace section 26AAC of the ITAA.

2.2 The new regime will provide that, where the employer of an employee provides to the employee or his or her associate shares or rights to shares at a value less than market value, an amount is to be included in the assessable income of the employee. Where the shares or rights are qualifying shares or rights , i.e., certain conditions are satisfied, concessional arrangements will apply in taxing the amount.

2.3 The CGT provisions contained in Part IIIA of the ITAA are being amended to ensure that there is no double taxation and that the advantage gained by concessions for qualifying shares or rightswill not be clawed back under the CGT provisions. Amendments will also be made to the Fringe Benefits Tax Assessment Act 1986 (FBTAA) to ensure that there is no double taxation .

2.4 The new regime will also apply to shares or rights provided to non-employees in return for services rendered.

2.5 Tables setting out guidance to a number of the provisions are set out in the Appendix to this chapter.

Summary of the amendments

Purpose of the amendments

2.6 A new Division 13A of Part III is inserted into the ITAA to provide for the taxation of shares or rights acquired under an employee share scheme. The assessable amount will be the difference between the value of the share or right and any amount paid by the employee to acquire the share or right. The new Division will also tax shares or rights provided to an associate of an employee as if they were provided to the employee. Concessions are provided where the shares or rights to shares are qualifying shares or rights, i.e., they satisfy certain criteria.

2.7 Item 1 of the Bill inserts provisions into the ITAA to:

·
provide that where a taxpayer acquires a share or a right to a share under an employee share scheme the discount on the share or right is to be included in the assessable income of the taxpayer [new subsection 139B(1)] ;
·
set out when a taxpayer is to include the discount on the shares or rights obtained under an employee share scheme in his or her assessable income [new subsections 139B(2) and (3)] ;
·
set out when a taxpayer is taken to have acquired a share or a right to acquire a share, under an employee share scheme [new section 139C] ;
·
set out how to calculate the discount [new section 139CC] ;
·
describe qualifying shares and rights including the non-discriminatory requirement that must be satisfied before a share or right will be a qualifying employeeshare or right [new section 139CD] ;
·
set out the concessional tax treatment that is available for qualifying employee shares or rights [new sections 139BA, 139CA, 139CB , 139CE and 139E] ;
·
set out the stricter non-discriminatory requirements that must be satisfied before the $500 exemption can apply to qualifying shares or rights [new sections 139CE and 139GE] ;
·
provide that shares or rights acquired by an associate of the employee under an employee share scheme will be taxed as if they were acquired by the employee [new section 139D] ;
·
set out the manner of determining the value of shares or rights acquired under an employee share scheme [new sections 139CC, 139F, 139FA-FN] ;
·
provide that where both a legal and a beneficial interest in a share or right are acquired by the same taxpayer or by more than one taxpayer only the taxpayer holding the beneficial interest will need to include an amount in his or her assessable income [new section 139DA] ;
·
set out when an employer is entitled to a deduction for the cost of providing shares or rights under an employee share scheme [new section 139DB] ;
·
provide a deduction to the employer for up to $500 of certain qualifying shares or rights provided to employees [new section 139DC] ;
·
provide that in certain circumstances an employee will be entitled to a refund of income tax paid on share rights [new section 139DD] ;
·
ensure that shares or rights provided to employees by a company group through investment companies are not texed concessionally [new section 139DF] ;
·
specify the meaning of 'acquiring a share or right' [new section 139G] ;
·
ensure that if an amount is assessable under new Division 13A of Part III then no amount will be assessable under section 26(e), 21A or section 26AAC of the ITAA [new section 139DE and items 2 and 3] ;
·
determine the cost base of an employee share or right for capital gains tax (CGT) purposes [item 7; new sections 160ZYJB, 160ZYJC, 160ZYJD and 160ZYJE of the ITAA] ;

2.8 The Bill will also make an amendment to the definition of 'fringe benefit' contained in subsection 136(1) of the FBTAA to ensure that there will be no double taxation of the benefits from employee share schemes [item 9] . To avoid any double taxation with the foreign investment fund provisions, the Bill will exempt shares or rights from the foreign investment fund provisions for the period up until they are taxed under the employee share scheme provisions. [Item 8, new section 530A]

2.9 The purpose of the changes is to counter the arrangements which exploit the existing legislation (section 26AAC of the ITAA). They also ensure that the concessions available are directed at employee share schemes which encourage investment by employees in their employer company, or in their employer company's holding company, and which are available to all permanent employees.

Date of effect

2.10 Subject to certain transitional arrangements [item 11] , the amendments will apply from 6pm in the ACT (and the equivalent times elsewhere) on 28 March 1995.

Background to the legislation

The current legislation

2.11 Section 26AAC was inserted into the ITAA to provide for the taxation of benefits that arise from shares, or rights to acquire shares, acquired under an employee share scheme by an employee, or a relative of an employee, for services rendered by the employee.

2.12 Section 26AAC replaced section 26(e) of the ITAA as the basis for taxing benefits acquired under an employee share scheme.

2.13 Under section 26AAC, a taxpayer is taken to have acquired a share or right to acquire a share in a company under a scheme for the acquisition of shares by employees if the share or right to acquire the share is in relation directly or indirectly to the employment or services rendered by the taxpayer or a relative of the taxpayer.

2.14 There are two types of arrangements under which shares or rights to acquire shares can be received. The first is where a company issues shares or rights to acquire shares to employees in the company, or in another company (or to the employee's relatives). The second is where shares of the company, or of another company, are issued to a trustee to be held on behalf of the employees (or their relatives). In this case, the trustee must be authorised to sell or transfer the shares to the employees or their relatives.

2.15 Shares can be subject to restrictions or conditions so that the right of the taxpayer to dispose of the share is restricted or the taxpayer can be divested of his or her ownership of the share. Section 26AAC operates to deem these shares to be acquired when the restrictions or conditions cease to have effect. An election is available in the case of shares which are subject to restrictions. The taxpayer can elect to be assessed in the year in which the shares are acquired and not in the year in which the restrictions or conditions cease.

2.16 In the case of rights to acquire shares, the normal taxing point is when the rights are sold or exercised. However, the taxpayer can elect to be assessed in the year in which the right is issued and not in the year in which the right is sold or exercised. The value of a share or right to acquire a share subject to restrictions or conditions is not to be discounted because of those restrictions or conditions.

2.17 Concessional treatment is available for certain employee share acquisition schemes. This concession will exclude up to $200 per year from the assessable income of an employee on shares or rights to acquire shares. The concession is limited to a discount of up to 10 per cent of a maximum of $2000 worth of shares. If this concession is used, the taxpayer cannot take advantage of the tax deferral opportunity outlined above. A taxpayer can elect not to apply the concession.

2.18 The CGT provisions apply generally to deem the cost of acquisition to the employee of the employee share scheme shares to be the market value of the shares that was taken into account in calculating the income arising to the taxpayer under section 26AAC. If the benefit arising from a right to acquire shares was taken into account in calculating the income arising to the taxpayer under section 26AAC, the cost of acquisition of the right will be the market value of the right at the time it was taken into account in calculating the income.

2.19 Where concessional treatment was provided for employee share scheme shares or rights, the CGT provisions also operate to reduce the cost base of the shares and rights to acquire shares. This is done by reducing the market value of the shares or rights to acquire shares by the amount of the exclusion allowed under section 26AAC. These provisions effectively 'claw-back' the concession made available by section 26AAC by reducing the cost base of the shares or rights to acquire shares and therefore increasing the taxpayer's liability to CGT.

Explanation of the amendments

2.20 The Bill inserts new Division 13A of Part III of the ITAA [item 1] . This Division will replace section 26AAC and will operate to tax benefits provided by an employer to employees and their associates in the form of shares or rights to acquire shares under an employee share scheme [item 3] . The Bill will also make other consequential amendments to the ITAA and the FBTAA.

Amount to be included in assessable income

2.21 If a taxpayer has acquired a share or right under an employee share scheme, the taxpayer is to include in his or her assessable income the discount given in relation to the share or right. [New subsection 139B(1)]

Employee share schemes

2.22 An employee will be taken to have acquired shares or rights under an employee share scheme if the share or right was acquired by the employee in respect of, or in relation directly or indirectly to his or her employment. A non-employee will also be taken to have acquired shares or rights under an employee share scheme if the shares or rights are acquired in respect of, or in relation to, services rendered. The new Division will also apply to associates of employees and non-employees. [New subsections 139C(1) and (2)]

2.23 A taxpayer is taken not to have acquired a share or a right to a share under an employee share scheme, for the purposes of new Division 13A, in the following circumstances:

·
where the share was acquired as a result of exercising a right that the taxpayer acquired under an employee share scheme; or
·
the share or right was acquired by the taxpayer, being the trustee of a trust where the sole activities of the trust are to obtain shares, or rights to acquire shares and provide those shares or rights to employees of the employer or associates of the employees [new subsections 139C(3) and (4)] .

When the discount has to be included in assessable income

2.24 The discount is to be included in the taxpayer's assessable income in the year of income in which the share or right is acquired [new subsection 139B(2)] . However, where the shares or rights are qualifying shares or rights and no election has been made under new section 139E to have the discount taxed in the year of income in which the share or right is acquired, the discount is to be included in assessable income in the year of income in which the 'cessation time' occurs [new subsection 139B(3)] . This will be:

Cessation time

·
in the case of shares without restrictions, or where the taxpayer is not liable to be divested of ownership of the shares, - the time at which the shares are acquired;
·
in the case of shares with restrictions or if the taxpayer is liable to be divested of ownership of the shares the earliest of the following times:

-
when restrictions are lifted;
-
when the shares are sold;
-
when the taxpayer ceases to be employed by the employer company, a holding company of the employer company, a subsidiary of a holding company, or a subsidiary of the employer company; or
-
five years from the time that the shares were provided to the taxpayer;

·
in the case of share rights, the earliest of the following times:

-
when the rights are exercised;
-
when the rights are sold;
-
when the taxpayer ceases to be employed by the employer company, a holding company of the employer company, a subsidiary of a holding company, or a subsidiary of the employer company; or
-
five years after the rights are provided to the taxpayer;

·
an exception will be where the rights are exercised to receive shares subject to restrictions (in which case the shares would be taxable at the earliest of when the restrictions were lifted, when the employee left the employer, or five years after the rights were received). [New sections 139CA and 139CB]

2.25 'Holding company' is defined to have the same meaning as in the Corporations Law. [New section 139GC]

Shares or rights acquired by associates to be taxed as if they were acquired by the taxpayer

2.26 If shares or rights to shares are acquired by an associate of the taxpayer under an employee share scheme, the taxpayer will be taxed in relation to those shares or rights as if they were the shares or rights of the taxpayer [new section 139D] . The measure ensures that no tax advantage can be obtained by a taxpayer through income splitting, e.g. an employee could benefit when an employer provides shares or rights to an associate of the employee who is on a lower marginal tax rate than the employee.

2.27 As noted in paragraph 2.23, this provision will not apply where the associate of an employee is a trust whose sole activities are to obtain shares or rights to acquire shares for the purpose of providing them to employees or associates of employees. These trusts have been excepted so as to avoid double taxation, i.e. the trustee of the trust will not be assessed on the same amounts that will be assessed under the new Division in the hands of the employees.

2.28 For the purposes of the Division, the term 'associate' is defined to have the same meaning as in section 26AAB(14). However this definition has been expanded to include an 'employee company' as an associate. An employee company is a company:

·
in which an employee or associate of the employee holds (indirectly or indirectly through interposed companies partnerships or trusts) a share or right to a share; and
·
to which an employer provides shares or rights in relation to the employment of the employee . [New section 139GD]

Meaning of 'acquiring a share or right'

2.29 For the purposes of the new Division, a share or right is taken to have been acquired by a person (i.e. the employee or associate, the trustee or company) when:

·
the share or right is transferred to that person;
·
the share is allotted to that person; or
·
the right is created in that person.

A person is also taken to acquire a share or right when a person acquires a legal or beneficial interest in a share or right. [New section 139G]

Qualifying shares or rights

2.30 Under the new provisions a share or right obtained under an employee share scheme could be a qualifying share or right. Concessional taxation treatment (ie. the discount can be assessed in a later year - see paragraph 2.33 below) is available for qualifying shares or rights. These are shares or rights issued under a scheme where:

-
the shares or rights are acquired under an employee share scheme;
-
the shares or rights are shares or rights in the employer company or in the holding company of the employer company;
-
at the time the share or right is acquired each permanent employee is entitled to or has been entitled to acquire shares or rights under the employee share scheme. A transitional provision will apply so that an employee will be taken to have been entitled to acquire shares or rights under an employee share scheme if the shares or rights were offered under an employee share scheme operated by the employer or a holding company of the employer before this Division commenced [item 14] ;
-
the shares are 'ordinary shares' or the rights to acquire shares are rights to acquire 'ordinary shares';
-
the employee does not directly or indirectly hold - and after receiving the shares would not hold - more than 5% of the shares of the employer company or a holding company;
-
the employee is not in a position, after receiving the shares or rights, to cast or control the casting of more than 5% of the maximum number of votes at a general meeting of the company. [New section 139CD]

2.31 Where, however, shares or rights are issued and:

-
the taxpayer receiving the shares or rights is employed by an investment company and by another company;
-
the investment company and the other company are part of the same group; and
-
the predominant business of the investment company was to acquire, sell or hold shares, securities or other investment,

then those shares or rights are not qualifying shares or rights. [New section 139DF]

2.32 A holding company that holds shares in operating subsidiaries that are not investment companies will not itself be an investment company.

Calculation of discount received on shares or rights

2.33 As outlined in paragraph 2.21 above, a taxpayer is required to include in his or her assessable income the discount on shares or rights received under an employee share scheme. The discount is to be calculated as follows:

·
where the discount is to be included in the taxpayer's assessable income in the income year that the shares or rights are acquired (i.e. they are shares or rights to which subsection 139B(2) applies) the discount will be the market value of the share or right less any amount paid by the taxpayer as consideration for the share or right [new subsection 139CC(2)] ;
·
where the discount is to be included in the taxpayer's assessable income in a later year of income because the shares or rights are qualifying shares or rights and the 'cessation time' occurs at a later time (i.e. they are shares or rights to which new subsection 139B(3) applies) the value of the shares or rights will be:

-
if the shares or rights are disposed of within 30 days of the 'cessation time' , the discount will be the consideration received by the taxpayer for the disposal less any amount paid by the taxpayer as consideration for the acquisition of the share or right and, if a right has been exercised, any amount paid to exercise the right;
-
if the shares or rights are not disposed of within 30 days of the 'cessation time' the discount will be the market value of the share or right at the 'cessation time' less any amount paid by the taxpayer as consideration for the acquisition of the share or right and if a right has been exercised any amount paid to exercise the right [new subsections 139CC(3) and (4)] .

2.34 For the purpose of the above calculations the market value of a share or right is calculated in accordance with new section 139F which is explained at paragraph 2.40 below.

Election

2.35 A taxpayer may make election that the discount received on qualifying shares or rights be included in their assessable income in the year of income in which the shares or rights are acquired. [New subsection 139E(1)]

2.36 An election must be made on or before the date of lodgement of the return of income of the taxpayer for the year of income in which the share or right was acquired, or before such later date as the Commissioner allows. [New subsection 139E(2)]

$500 exemption

2.37 An income tax exemption up to a limit of $500 can apply to qualifying shares or rights in the year of income in which those shares or rights are acquired where an election has been made under new subsection 139E(1) and certain additional conditions are satisfied. [New subsection 139BA]

2.38 The additional conditions that must be satisfied before the $500 exemption can apply are:

-
the scheme cannot have any conditions that could result in any recipient forfeiting ownership of shares or rights; and
-
the employee cannot dispose of a share or right before the earlier of the end of a period of 5 years from the date they were acquired or the time when the employee ceases to be employed by the employer; and
-
the scheme must be conducted on a non-discriminatory basis. [New section 139CE]

2.39 An employee share scheme is taken to operate on a non-discriminatory basis where:

-
participation in a scheme is open to all permanent employees of an employer company or the holding company of the employer. The term 'permanent employee' means a full-time employee with at least 24 months service or a permanent part-time employee with at least 24 months service. The term does not include:
-
an employee who is in Australia on a temporary entry permit for up to a total of 4 years;
-
an employee who is not resident in Australia;
-
an employee who is a director of the employer company; or
-
persons not physically present in Australia [new section 139GB] ;

The terms 'employee' and 'employer' are taken to have the same meanings as in section 221A of the ITAA [new section 139GA] .

-
the time for acceptance of the offer is reasonable and is the same for all permanent employees;
-
the consideration for the acquisition concerned, the minimum and maximum number of shares or rights to acquire shares offered and the information made available about the offer is the same for all permanent employees; and
-
any scheme for the provision of financial assistance for the acquisition of shares or rights to acquire shares is open to all permanent employees and is the same for all permanent employees. 'Financial assistance' includes the making of a loan, the giving of a guarantee, the provision of security, the release of an obligation, and the forgiveness of a debt [new section 139GF] . [New section 139GE]

Market value of shares or rights

2.40 In determining the taxable value, the market value of a share or right to acquire a share on a particular day is to be determined as follows:

·
where a share or right to acquire a share is quoted on an approved stock exchange , the market value will be:

-
the last published price of the share on that day; or
-
if this information was not published or if there is no transaction relating to that share on that day - the last price at which an offer was made for the share or right on that day; or
-
if no offer was made on that day - the weighted average of the prices at which those shares or rights were traded on that stock market during the one week period before that day; or
-
if there were no transactions on the stock market in that one week period in such shares or rights - the last price at which an offer was made on that stock market in that period to buy such a share or right [new section 139FA] ;

·
where a share is not quoted on an approved stock exchange , the market value will be the value determined by an arm's length company auditor [new subsection 139FB(1)] :

-
in valuing a partly paid share a number of factors are required to be taken into account including (but not limited to) the amount of the value of the share that is already paid, the amount and timing of future calls and rights to dividends that arise from holding the shares [new subsection 139FB(2)] ;

·
where a right to acquire a share is not quoted on an approved stock exchange, the market value of the right will be determined by reference to the Tables at new sections 139FJ-FN . If the right to acquire a share is for a period exceeding 10 years from the date of acquisition of that right, the market value will be the greatest of:

-
the value determined by a suitably qualified person;
-
the value that would have been calculated by using the Tables at sections 139FJ-FNas if the right to acquire the share was for a period of 10 years; and
-
the market value of the share that may be acquired by the exercise of that right less the lowest amount that must be paid to exercise the right to acquire the share.

The last lower limit applies to the valuation of all rights which have not been quoted on an approved stock exchange [new section 139FC] ;

·
in determining the market value of a non-quoted share or a right to acquire a share any restrictions placed on the share or right to acquire the share are to be disregarded [new section 139FD] ;
·
where the exercise price of a right to acquire a share cannot be determined, or is nil, the market value of the right to acquire a share will be the market value of the share on that day [new section 139FE] ;
·
where a person acquires a legal or beneficial interest in a share or right, that person is taken to have acquired a share or right and the market value to be taken into account is the market value of the share right [new section 139FF)] ;
·
what constitutes an 'approved stock exchange' is set out in new section 139GCA .

2.41 To the extent that it is reasonably possible, an employer will be required to provide to the taxpayer information relating to the market value of the shares or rights as is necessary for that taxpayer to determine the amount to be included on his or her assessable income. This information is to be provided within 30 days of the day that the request for such information was received by the employer. [New subsection 139FI]

2.42 As indicated above, the method used to value rights to acquire shares which are not quoted on an approved stock exchange is set out in new subsection 139FC. It will not be necessary to value rights using the tables set out in new subsections 139FJ-FN where the rights are qualifying rights, no election has been made and the rights are exercised within a period of five years (provided the rights are not sold or the employee does not cease employment before five years).

2.43 The Tables contained in new sections 139FJ-FN use an accepted methodology for valuing options, which has been modified to make them easier to use. Further, the variable factors underlying the tables are generally concessional.

Refunds

2.44 Situations may arise where rights to acquire shares are given to employees and there are conditions attached to those rights which result in the employee being unable to exercise the rights. These rights to acquire shares would have been valued as if the restrictions did not apply. Where an employee loses these rights to acquire shares without ever having had the power to exercise the rights, solely because of termination of employment or because the exercise of the rights was conditional on certain employer performance targets being met, the employee, on application, will be treated as never having provided thebenefit.

2.45 The refund will only be provided in respect of rights received in the employer company or holding company of the employer company. [New section 139DD]

Deductions

2.46 New Division 13A will also provide that no deduction will be available to the provider of shares or rights under an employee share scheme until the share or right is acquired by the taxpayer. For example, where an employer provides money or property to a trust so that the trustee can acquire shares which will later be passed on to employees, no deduction will be available to the employer until the shares or rights are acquired by the employee. [New section 139DB]

2.47 Where an employer provides qualifying shares or rights to an employee and the exemption conditions of new section 139CE are satisfied, the new Division will allow a deduction to the employer in respect of the shares or rights. That deduction cannot exceed $500 per employee for an income year. No deduction will be available where the employer is otherwise entitled to a deduction for those shares or rights. [New section 139DC]

Capital gains tax

2.48 The ITAA is also being amended to set out the basis upon which shares or rights provided under an employee share scheme will be subject to CGT. [Item 7]

2.49 Where a share or right under an employee share scheme is provided by a provider to an employee (or trust or company), there will generally not be a disposal of the share or right where the share or right is newly created (paragraphs 160M(5)(a) and 160ZZC(3A)(c)).

2.50 Where a share or right under an employee share scheme is acquired by an employee, the amount that will be taken to have been paid by the taxpayer as consideration for the purposes of the CGT provisions will be:

-
where the discount on the share or right to acquire a share is to be included in assessable income in the year of income in which the share or right was acquired - the greater of the amount actually paid for the share or right or the market value of the share or right at the time of acquisition of the share or right [new subsection 160ZYJB(2)] ;
-
where the share or right is a qualifying share or right and the discount has been included in the taxpayer's assessable income in a later year of income, i.e., the year of income in which the 'cessation time' occurs, then:

-
if the share or right is disposed of by the taxpayer at the 'cessation time' or within 30 days of the 'cessation time' , Part IIIA of the ITAA does not apply in respect of the disposal of the share or right by the taxpayer [new subsection 160ZYJB(3)] ;
-
if the share or right is not disposed of by the taxpayer at or within 30 days of the 'cessation time', the taxpayer will be taken to have paid, at the 'cessation time' an amount equal to the market value of the share or right [new subsection 160ZYJB(4) of the ITAA] .

2.51 A provision is inserted which applies to shares or rights disposed of by an associate of a taxpayer. For the purpose of calculating the capital gain on the disposal of the share or right, the associate will be taken to have paid the greater of the amount paid by the associate and the market value of the share or right at the time of acquisition. [New section 160ZYJC]

2.52 A provision is also inserted that applies to shares or rights acquired by a trustee of a trust where under the terms of the trust the trustee is authorised to transfer or sell the shares or rights to employees. Where the share or right is provided through a trust arrangement, the CGT provisions will not apply to the disposal of the share or right by the trustee unless the consideration paid for the share or right on disposal exceeds the indexed cost base of the share or right. If the trustee held the share or right for a period of less than 12 months, the CGT provisions will not apply to the disposal unless the consideration paid for the share or right on disposal exceeds the cost base of the share or right. [New section 160ZYJD]

Eligible termination payments

2.53 Section 27A of the ITAA is amended to ensure that amounts which will be taxed under new Division 13A of the ITAA will not be included as, or as part of, an eligible termination payment on termination of employment [item 4] . The Superannuation Entities (Taxation) Act 1987 is also being amended to ensure that eligible termination payments representing discounts on shares or rights will not count towards superannuation reasonable benefit limits. This measure will be retrospective to 24 December 1991 to ensure that taxpayers who did receive such benefits which were counted for RBL purposes between 24 December 1991 and 28 March 1995 will not be disadvantaged compared to other taxpayers [item 10; new section 21 of the Superannuation Entities (Taxation) Act 1987] .

Fringe benefits tax

2.54 The amendment to the definition of 'fringe benefit' contained in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 will ensurethat benefits acquired by employees and their associates under an employee share scheme will not be subject to fringe benefit tax.

2.55 Also, where an employee share scheme is operated through a trust, the trustee will not be liable to fringe benefits tax on any money or property transferred to the trustee where the sole activities of the trust are to obtain shares or rights to acquire shares and to provide those shares or rights to employees of the employer. [Item 9]

Foreign investment fund provisions

2.56 Some shares which fall to be taxed under the new employee share scheme provisions may also be subject to tax under the foreign investment fund provisions of the ITAA. To avoid any double taxation, and to ensure that the deferral concession of the new employee share scheme provisions remains available, the Bill will insert a new section which exempts shares or rights from the foreign investment fund provisions for the period prior to the time at which those shares or rights are taxed under the new employee share scheme provisions. [Item 8, new section 530A]

Transitional arrangements

2.57 Where a share is acquired by a taxpayer after 6pm in the ACT (and the equivalent time elsewhere) on 28 March 1995 - referred to in this section as the relevant time - as a result of exercising a right which was acquired under an employee share scheme prior to that time and which was held by the taxpayer at that time, section 26AAC of the ITAA will continue to apply to that share. [Item 11]

2.58 Section 26AAC will also continue to apply where any one set of the conditions stated below is satisfied:

-
offers to employees of employer company (or holding company) shares or rights or invitations to employees to make offers to acquire such shares or rights made prior to the relevant time where the benefits are provided prior to 1 July 1995;
-
employer (or holding company) shares and rights provided to employees prior to 1 July 1996 by public companies (as defined in Corporations Law ) or their subsidiaries under schemes approved by shareholders prior to the relevant time; and
-
offers of non-employer company shares up to a value of $1000 per recipient (not just employees) or offers of rights to acquire shares up to a value of $1000 of shares where the offer was made prior to the relevant time and the shares or rights are acquired prior to 1 July 1995. For the purpose of this transitional provision the value of the right is equivalent to the value of its underlying share.

2.59 A taxpayer may elect that these transitional arrangements do not apply. That is, the new employee share scheme provisions will apply. [Item 12]

Appendix

The following charts provide general guidance to the employee share provisions.

Chart 1 - When is a share or right acquired under an employee share scheme?
Shares or rights provided to: Time when the acquisition occurs:
An employee Time when employee gets any legal or beneficial interest in the shares or rights.
An associate of the employee Time when associate gets any legal or beneficial interest in the shares or rights.
A trust of which the employee or an associate is a beneficiary and has a beneficial interest in the shares or rights Time when the beneficiary acquires the beneficial interest in the shares or rights.
A trust of which the employee or an associate is a beneficiary who does not have a beneficial interest in the shares or rights Time when the trust transfers any legal or beneficial interest in the shares or rights to the employee or associate of the employee.
A company controlled by the employee or an associate. The concept of 'control' has a wide coverage. Time when the company gets any legal or beneficial interest in the shares or rights.
A company where it is reasonable to conclude that the shares or rights were provided for the benefit of an employee, e.g. a company not controlled by an employee but of which employees are shareholders. Time when the company gets any legal or beneficial interest in the shares or rights.
An 'interposed company or trust' to which an employer provides funds so that the interposed company or trust can directly or indirectly provide shares or rights to employees. Time when company or trust transfers legal or beneficial interest in the shares or rights to employee.
Chart 2 - Shares not subject to restrictions - when are they taxed?
Transaction Taxing point
Employee or associate acquires share Employee subject to income tax on discount in year of income that share was acquired.
Employee disposes of share Any gain or loss is taxed in year of disposal.
Chart 3 - Shares subject to restrictions or rights - when are they taxed?
Transaction Taxing point
Employee or associate acquires share or rights that is not qualifying share or right Employee subject to income tax on discount in year of income that share or right was acquired.
Employee acquires qualifying share or right Employee subject to income tax on reduced amount where $500 exemption applies in the year that share or rights were acquired. In other cases, the full amount is taxable in year of income in which the 'cessation time' occurs. (see paragraph 2.24)
Share or right disposed of Any gain or loss is taxed in year of disposal but CGT does not apply where shares or rights are disposed of on or within 30 days of the 'cessation time'.
Chart 4 - Rights - converted into shares - when are they taxed?
Transaction Taxing point
Employee or associate acquires right that is not a qualifying right Employee subject to income tax on discount in year of income that right is acquired.
Employee or associate acquires right that is a qualifying right Employee subject to income tax in year of income that 'cessation time' occurs.
Employee or associate acquires right that is converted into share with restrictions Employee subject to income tax in year of income that 'cessation time' occurs.
Share disposed of Any gain or loss is taxed in the year of disposal.
Chart 5 - What amount is to be included in assessable income?
When the share or right is not a qualifying share or right:
The amount to be included in the assessable income of the employee is the market value of the share or right at the time of acquisition reduced by the consideration paid by the employee or associate.
When the share or right is a qualifying share or right:
Where an election has been made to have the amount included in the assessable income in the year the share or right was acquired, the amount as calculated above can be reduced by up to $500 where certain other conditions apply.
Where an election has not been made, the amount included in assessable income is:
the market value of the shares at the 'cessation time' (or if the shares or rights are sold within 30 days of the 'cessation time', the consideration received by the employee or associate)
less
any amount paid by the employee or associate as consideration for the share or right; and
if the share has been obtained as a result of the exercise of a right, any amount paid to exercise the right.
Chart 6 - Market value of an employee share or right
Rule 1.
Share or right quoted on a stock market of an approved stock exchange on the valuation date:
* If there was at least one transaction on that day - the last published price at which the share or right was traded on that day.
* If the above information is not published or there were no transactions in such shares or rights on that day - the last price at which an offer was made on that day to buy such a share or right.
* If no offer was made on that day - the weighted average of the prices at which those shares or rights were traded on that stock exchange during the one week period before that day.
* If there were no transactions on the stock exchange in that one week period in such shares or rights - the last price at which an offer was made on that stock exchange in that period to buy such a share or right.
Rule 2.
Where Rule 1 does not apply, the market value of a share is the arm's length value of the share shown in a report provided by a person who is registered as a company auditor.
Rule 3.
Where Rule 1 does not apply, the market value of a right is the value determined in accordance with the Regulations. If no such Regulations are in force, the tables in sections 139FF-FG are to be used to value the rights. Rights which can be exercised beyond 10 years must be valued using a qualified valuer but the value cannot be less than the value that would have been determined if the right could only be exercised for 10 years.
In any case, the market value of a right to acquire a share cannot be less than the market price of the share less the lowest exercise price of the right.
Rule 4.
If the exercise price of a right is nil, or cannot be determined, the market value of the right will be the market value of the share on that day.
Rule 5.
The market value of a share or right is determined as though there were no restrictions applying to the shares or rights. The market value of a beneficial interest in a share or right is the market value of that share or right.
Chart 7 - Capital gains - what is consideration for acquisition of shares or rights by taxpayers
* The consideration paid by a taxpayer for the employee shares not subject to restrictions or non qualifying rights is the greater of the amount actually paid or the market value of the shares or rights at the time the taxpayer acquired any legal or beneficial interest in the shares or rights.
* Where the shares or rights are qualifying shares subject to restrictions or qualifying rights and the shares or rights are disposed of at, or within 30 days of, the 'cessation time', CGT does not apply. If the shares or rights are disposed of outside 30 days of the 'cessation time' the consideration will be the market value of the shares or rights at the 'cessation time'.


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