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Authorisation Number: 1011608740875

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Ruling

Subject: Capital gains tax - employee share scheme - disposal of shares - CGT event A1

Question:

Did CGT event A1 occur when you disposed of the shares you had acquired as a result of exercising your options?

Answer:

Yes.

This ruling applies for the following period:

Year ended 30 June 2008

The scheme commences on:

1 July 2007

Relevant facts and circumstances

You were granted a number of employee options after 20 September 1985.

The shares in the company you were granted options in had a market value on the date of grant.

You did not pay any consideration to acquire the employee options.

You did not make a section 139E election in relation to these employee options.

The restrictions on these options outlined that you could only exercise them in increments, on or after each vesting date, and prior to the last date of exercise.

The options had an exercise price equal to the market value of the shares.

You have exercised the first allotment of options into shares and disposed of them in the same income year.

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 13A

Income Tax Assessment Act 1936 Subsection 139B(1)

Income Tax Assessment Act 1936 Subsection 139B(2)

Income Tax Assessment Act 1936 Subsection 139C(1)

Income Tax Assessment Act 1936 Subsection 139C(3)

Income Tax Assessment Act 1936 Section 139CB

Income Tax Assessment Act 1936 Subsection 139CC(3)

Income Tax Assessment Act 1936 Subsection 139CC(4)

Income Tax Assessment Act 1936 Section 139E

Income Tax Assessment Act 1936 Section 139FA

Income Tax Assessment Act 1936 Section 139FC

Income Tax Assessment Act 1936 Section 139FK

Income Tax Assessment Act 1936 Section 139FL

Income Tax Assessment Act 1936 Section 139FM

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 115-25

Income Tax Assessment Act 1997 Section 134-1

Reasons for decision

Application of employee options under the employee share scheme provisions 

Division 13A of the Income Tax Assessment Act 1936 (ITAA 1936) provides for the taxation treatment of options acquired under an employee share scheme by including any discount of the options in the taxpayer's assessable income.

Division 13A of the ITAA 1936 will not apply where:

· the consideration for the acquisition of a share or a option is equal to, or more than, the market value of the share or option at the time that it is acquired

· a share is obtained by the exercising an option that the taxpayer acquired under an employee share scheme; and

· a share is acquired by a trustee of a trust whose sole activities are obtaining shares or options and providing those shares or options to employees or associates.

Where the consideration for the acquisition is less than the market value, the share or option is considered to have been acquired at a discount and will be covered under the employee share scheme provisions.

Calculation of the market value of the options

The market value of unlisted options is calculated in accordance with sections 139FC and 139FJ to 139FM of the ITAA 1936.

Section 139FC of the ITAA 1936 provides that the market value of unlisted options is the greater of:

the market value, on that day, of the share that may be acquired by exercising the option, less the lowest amount that must be paid to exercise the option to acquire the share

In this situation, using paragraph 139FC(a) of the ITAA 1936, the market value of the options has been calculated as Nil per option.

; or

if the option can not be exercised more than 10 years after the day when the option was acquired - the value is determined in accordance with sections 139FJ to 139FN

In your case, using paragraph 139FC(b) of the ITAA 1936, the market value of the options in accordance with section 139FJ to 139FN, is calculated as an amount just over $4.00.

As the market value of your option calculated using Table 1 is the greater of the two amounts, the higher amount is the market value for each option.

In your case, you have not paid any consideration to acquire the options, but they have a market value. As the consideration you were required to pay for the acquisition of the options is less than the market value of the options, the options are viewed as having been acquired at a discount, and will be covered under the employee share scheme provisions.

When you acquire options under an employee share scheme, you first need to consider the taxation of the employee share scheme discount before considering any capital gains tax (CGT) implications.

Cessation time

Where an employee does not make a section 139E election, the discount received on the qualifying options is included in the employee's assessable income in the income year in which cessation time occurs.

When the shares acquired as a result of the exercising of the options are not disposed of at arm's length within 30 days of the cessation time, the discount is the market value of the shares at cessation time less:

· any consideration paid or given by the employee for their acquisition; and

· if the options have been exercised, any consideration paid or given by the employee to exercise them.

In your case, you did not make a section 139E election in relation to your employee options. Cessation occurred when the first allotment of options were exercised. Therefore, you must include the discount in the income year in which cessation occurred.

Disposal of shares

CGT event A1 occurs when an ownership interest in a CGT asset is transferred to another entity. The disposal of the shares you acquired as a result of exercising your options will result in a CGT event A1 occurring.

If an arms length CGT event A1 happens in relation to shares acquired as a result of exercising options within 30 days of the cessation time, the capital gain or capital loss is disregarded.

When an arms length CGT A1 does not happen within 30 days of the cessation time, the first element of the cost base, or reduced cost base of the shares, is their market value at cessation time. Where a CGT event happens in relation to the shares, the capital gain or capital loss is calculated in accordance with the CGT rules applicable to that event. Where options are exercised, the shares are viewed as having been acquired on the date the options are exercised.

In your case, you exercised your options and disposed of the shares acquired as a result of exercising your options in the same income year. CGT event A1 occurred when you disposed of your ownership interest in the shares.

Whether you can disregard any capital gain or capital loss made on the disposal of the shares will be determined by the period that transpired between when cessation occurred and the date the shares were disposed of.

Note: If the shares are not disposed of within 30 days of cessation occurring, you will not be able to apply the 50% discount to any capital gain made on the disposal as you will not have owned the shares for at least 12 months prior to their disposal.

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