ATO Interpretative Decision

ATO ID 2003/892

Income Tax

Direct value shifting: options issued at a discount to market value
FOI status: may be released

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Issue

When options to acquire additional shares were issued to the shareholder at less than their market value, was the direct value shift (DVS) from the shareholder's existing shares a neutral value shift for the shareholder under section 725-220 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

Yes. Section 725-220 of the ITAA 1997 only requires that the sum of discounts received by a shareholder on the issue of the options be equal to the sum of market value decreases for that shareholder's shares.

Facts

A company has two shareholders, company N and company E.

As a result of an arrangement entered into after 30 June 2002, the company issued options at a discount to market value to both shareholders. The effect of issuing the options at a discount was a reduction in the market value of the existing shares of $100,000 for each shareholder. The total discount received by each shareholder was $100,000.

There is a DVS and both shareholders are affected by the direct value shifting rules.

Reasons for Decision

Where a direct value shift (DVS) occurs that has consequences under Division 725 of the ITAA 1997, the rules in the Division apply to modify the adjustable values of affected interests to take account of material changes in market value that are attributable to the DVS. The rules in Division 725 may also generate a capital gain on those interests that have decreased in market value as a result of the DVS.

Pursuant to section 725-220 of the ITAA 1997 there will be a neutral DVS if the total decrease in market value of an entity's interests that have decreased in value as a result of the DVS (down interests) is equal to the sum of:

•: the total increase in market value of that entity's interests that have increased in value as a result of the DVS (up interests); and
•: the total discounts given on the issue of interests (up interests) to that entity as a result of the DVS.

There is no requirement for any of the interests to be of the same kind.

If section 725-220 of the ITAA 1997 applies to a shareholder under the arrangement, then the consequences provided for in Division 725 apply to that shareholder as if the DVS were only from their down interests (shares) to their up interests (options). These consequences are set out in Subdivisions 725-D to 725-F.

The DVS from the issue of the options has resulted in the $100,000 fall in market value of each shareholder's shares and a discount of $100,000 was given on the issue of options to each shareholder. The total decrease in market value of each shareholder's down interests was equal to the total discounts given on the issue of their up interests.

The issue of the options was a neutral shift under section 725-220 for each shareholder in the company because the total decrease in market value of their shares was equal to the total discounts given on the issue of their options. There is no requirement for the interests to be of the same kind.

Date of decision: 29 August 2003

Year of income: Year ended 30 June 2004

Legislative References:
Income Tax Assessment Act 1997
   Division 725
   Subdivision 725-D
   Subdivision 725-E
   Subdivision 725-F
   section 725-220

Keywords
Capital gains tax
CGT assets
CGT share value shifting arrangements

Siebel/TDMS Reference Number: 3663803

Business Line: Public Groups and International

Date of publication: 3 October 2003

ISSN: 1445-2782

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