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Edited version of private ruling
Authorisation Number: 1011854796701
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Ruling
Subject: Employee Share Schemes (ESS)
Question and answer
Is the value of a share discount calculated on the value which you paid to acquire it?
Yes
This ruling applies for the following period
Year ended 30 June 2010
The scheme commenced on
1 July 2009
Relevant facts and circumstances
As a qualifying employee, you accepted an offer from your employer to take part in an employee share scheme.
In order to qualify for the ESS, you had to be in the employ of the offering company for no less than 6 months.
You were an Australian resident during the period which related to the acquisition of your share.
The options were for qualifying ESS shares.
Your share interest was acquired before 1 July 2009.
You did not make an election under section 139E election to be taxed at the time of share acquisition.
You exercised the options and obtained shares in July 2009.
Relevant legislative provisions
Income Tax Assessment Act 1997
Subdivision 83A-C
Section 83A-110
Reasons for decision
Where a taxpayer acquires a right under an employee share scheme prior to 1 July 2009 and elects to be assessable on the discount at a cessation time that is after 1 July 2009, subdivision 83A-C of the Income Tax Assessment Act 1997 (ITAA 1997) applies to determine the amount that is assessable.
Subdivision 83A-C of the ITAA 1997 allows for a deferred inclusion of the assessable income from an employee share scheme (ESS). Section 83A-110 of the ITAA 1997 includes in the income year in which the deferred taxing point occurs the market value of the ESS interest at that time, less the cost base of the ESS interest.
The term 'market value' takes its ordinary meaning with some modifications. In the context of employee share schemes, in calculating the market value of an ESS interest, you disregard any considerations or restrictions that prevent the taxpayer from converting the ESS interest to cash.
The High Court also adopted that test in Abrahams v FC of T (1944) 70 CLR 23 where Williams J said that market value is:
the price which a willing but not anxious vendor could reasonably expect to obtain and a hypothetical willing but not anxious purchaser could reasonably expect to have to pay ... if the vendor and purchaser had got together and agreed on a price in friendly negotiation.
The second part of the formula for calculating the assessable amount uses the capital gains concept of "cost base". As the cost base expenses may arise in the period between the acquisition of the ESS interest and the ESS deferred taxing point. The cost base includes amounts paid to purchase and exercise options and includes expenses such as brokerage, interest or other holding costs.
Further issues for you to consider
The following information is general guidance which is not binding on the Commissioner. It provides more general information that assists a variety of taxpayers to deal with their tax obligations. If a taxpayer relies on guidance that is found to be incorrect; or misleading and the taxpayer makes a mistake as a result, they will have to pay the tax payable under the law, but will be protected against shortfall penalty. If they have relied on the guidance reasonably and in good faith, they will also be protected against interest charges.
If you acquired employee share scheme interests before 1 July 2009 and you did not make an election to be taxed upfront at the time you received them, and a 'cessation time' occurred during the financial year, write the total amount of the relevant discount at item 12, label G of your income tax return.
Conclusion
You can go to the ESS assessable income calculator at www.ato.gov.au
Go to: Find a rate or calculator è Individuals & Families è Employee Share Schemes
The ESS assessable income calculator will:
· calculate the ESS assessable discount amount for unlisted rights - including options (ESS rights); and
· if required, calculate the weighted average closing share price of the underlying share (the share that may be acquired by exercising the right) on the date of the taxing point (acquisition or deferred).
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