ATO Interpretative Decision

ATO ID 2003/651 (Withdrawn)

Income Tax

• This ATO ID is withdrawn because it contains a view in respect of a provision of the Income Tax Assessment Act 1936 that does not apply after the 2008-09 income year. Despite its withdrawal, this ATO ID continues to be a precedential ATO view in respect of decisions for income years up to, and including, the 2008-09 income year.
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

For the purposes of paragraph 139FB(1)(b) of the Income Tax Assessment Act 1936 (ITAA 1936), will the Commissioner allow the company, an unlisted entity, to use the consideration that was paid, by an unrelated third party to its existing shareholder for a certain class of its unlisted shares, in a transaction that occurred six months ago, as the appropriate market value for the same class of unlisted shares that is to be issued to employees of its wholly owned subsidiary, where there has been no material change in the value of the class of unlisted shares since the transaction that occurred six months earlier?

Decision

Yes, for the purposes of paragraph 139FB(1)(b) of the ITAA 1936, the Commissioner will allow the company, an unlisted entity, to use the consideration that was paid, by an unrelated third party to its existing shareholder for a certain class of its unlisted shares, in a transaction that occurred six months ago, where the parties to the transaction dealt with each other at arm's length, as the appropriate market value for the same class of unlisted shares that is to be issued to employees of its wholly owned subsidiary, where there has been no material change in the value of the class of unlisted shares since the transaction that occurred six months earlier.

Facts

The entity is an unlisted company, registered overseas.

In the last sale, which occurred six months earlier, an existing shareholder in the company sold their shares in the company to an unrelated third party for a specified amount per share.

The company had intended to issue the same class of unlisted shares to employees of its wholly owned subsidiary at this time but did not do so.

The company now wishes to issue the same class of unlisted shares to employees of its wholly owned subsidiary for the same price as the specified amount per share that was paid by the unrelated third party to its shareholder in the transaction six months earlier.

There has been no material change in the value of the class of unlisted shares since the transaction between the unrelated third party and the company's shareholder.

Reasons for Decision

Paragraph 139FB(1)(b) of the ITAA 1936 gives the Commissioner a discretion to approve certain methods of calculating the arm's length market value of unlisted shares acquired by a taxpayer under an employee share scheme.

It provides that the market value of an unlisted share is the arm's length value of the share as calculated in accordance with a method approved in writing by the Commissioner as a reasonable method of calculating the arm's length value of unlisted shares.

The company seeks approval from the Commissioner to use the specified amount per share, which the unrelated third party paid to its shareholder for the same class of unlisted shares six months earlier, as the appropriate market value for the same class of unlisted shares that is to be issued to employees of its wholly owned subsidiary.

In determining whether this method of valuation is a reasonable method of calculating the arm's length value of the unlisted shares, it is necessary to consider whether the specified amount paid per share by the unrelated third party, to the company's shareholder was a value that was paid in an arm's length dealing.

'Arm's length', in relation to dealings, is defined in the Concise Oxford Dictionary as 'with neither party controlled by the other'.

The principle of 'arm's length dealing' was considered in The Trustee for the Estate of the Late AW Furse No 5 Will Trust v FC of T 91 ATC 4007, Hill J stated (at p 4015):

"What is required in determining whether parties dealt with each other in respect of a particular dealing at arm's length is an assessment whether in respect of that dealing, they dealt with each other as arm's length parties would normally do, so that the outcome of their dealing is a matter of real bargaining."

The question is not answered solely by asking whether the parties were at arm's length to each other. The emphasis is on whether the parties dealt with each other at arm's length and as such, it is a question of fact.

In the transaction that occurred six months earlier between the unrelated third party and the company's shareholder, where neither party was controlled by the other and the outcome of their dealing was a matter or real bargaining, they would have dealt with each other as arm's length parties would normally do. Under these conditions, it is considered that the specified amount paid per share by the unrelated third party to the company's shareholder was a value that was paid in an arm's length dealing.

There has been no material change in the value of the class of unlisted shares since the transaction between the unrelated third party and the company's shareholder.

Therefore, for the purposes of paragraph 139FB(1)(b) of the ITAA 1936, the Commissioner will allow the company, an unlisted entity, to use the consideration that was paid, by an unrelated third party to its existing shareholder for a certain class of its unlisted shares, in a transaction that occurred six months ago, where the parties dealt with each other at arm's length, as the appropriate market value for the same class of shares that is to be issued to employees of its wholly owned subsidiary, where there has been no material change in the value of the class of unlisted shares since the transaction that occurred six months ago.

Year of income:  Year ended 30 June 2003

Legislative References:
Income Tax Assessment Act 1936
   section 139FB.
   paragraph 139FB(1)(b).

Case References:
Furse (No 5) Will Trust, Trustee for the Estate of v. Federal Commissioner of Taxation
   21 ATR 1123
   91 ATC 4007

Keywords
Employee share schemes and options
Securities valuation

Business Line:  Private Groups and High Wealth Individuals

Date of publication:  1 August 2003

ISSN: 1445-2782