ATO Interpretative Decision

ATO ID 2003/189

Income Tax

Employee Share Scheme: employee loses rights for no valuable consideration
FOI status: may be released

CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

Issue

Is a right to acquire a share granted to a taxpayer, an employee, under an employee share scheme, never acquired by the taxpayer for the purposes of Division 13A of the Income Tax Assessment Act 1936 (ITAA 1936) because of subsection 139DD(1) of the ITAA 1936, if no valuable consideration was received by the taxpayer for the loss of the right?

Decision

Yes. A right to acquire a share granted to a taxpayer, an employee, under an employee share scheme, is never acquired by the taxpayer for the purposes of Division 13A of the ITAA 1936 because of subsection 139DD(1) of the ITAA 1936, if no valuable consideration was received by the taxpayer for the loss of the right.

Facts

The taxpayer was granted rights to acquire shares in their employer's company under an employee share scheme.

The taxpayer paid no consideration to acquire the rights.

Some rights were cancelled while the taxpayer was employed by the company, others were forfeited on the taxpayer ceasing to be an employee and the remainder lapsed after ceasing employment.

The taxpayer received no valuable consideration for the loss of the rights. The taxpayer did not exercise the rights.

Reasons for Decision

For the purposes of Division 13A of the ITAA 1936, a right to acquire a share in a company is never acquired by an employee under subsection 139DD(1) of the ITAA 1936 if the following two conditions are satisfied:

the employee loses the right without having exercised it; and
the company is the employee's employer or a holding company of the employer.

The taxpayer has not received valuable consideration for the loss of those rights. The rights cease to exist as they have been cancelled, forfeited or lapsed. The taxpayer has lost the rights without having exercised them.

Accordingly, as the taxpayer satisfies the two conditions, the rights are never acquired by the taxpayer for the purposes of Division 13A of the ITAA 1936.

If the discount given on the rights has been included in the taxpayer's assessable income, either in the year of acquisition, due to an election, or the year of cessation time, subsection 139DD(4) of the ITAA 1936 enables the assessment to be amended to exclude the discount.

Note - If the taxpayer receives valuable consideration for rights that have not been exercised, the taxpayer does not lose the rights for the purposes of Division 13A of the ITAA 1936.

Date of decision:  19 November 2002

Year of income:  Year ended 30 June 1999

Legislative References:
Income Tax Assessment Act 1936
   Division 13A
   subsection 139DD(1)
   subsection 139DD(4)

Keywords
Forfeiture of rights & entitlements
Share discounts on employee share schemes

Siebel/TDMS Reference Number:  247203; 1-5SUC50R

Business Line:  Private Groups and High Wealth Individuals

Date of publication:  4 April 2003
Date reviewed:  18 May 2015

ISSN: 1445-2782