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Authorisation Number: 1012163865141

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Ruling

Subject: Employee Share Scheme

Issue 1

Question 1

Can you calculate the market value of your rights according to its ordinary meaning and not determined by application of the relevant regulations?

Answer

Yes.

Question 2

Can you include characteristics that would prevent or restrict conversion of the right to money when calculating the market value of your rights?

Answer

No.

Issue 2

Question 1

Are you able to amend your tax return to remove the discount included in your assessable income on the rights that are subsequently forfeited?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2011.

The scheme commenced on

1 July 2008.

Relevant facts

You acquired a number of unlisted rights over several years.

The rights were available to senior staff after a period of time, if the company achieved specific performance targets.

You were made redundant from the company.

You received a redundancy package from that company.

As a good leaver the company permitted you to retain your interest in your unlisted rights.

The rights were valued by the company at the time of your redundancy.

You believe that the rights should be valued in accordance with the Black Scholes valuation methodology and adjusted to account for some non option like characteristics.

The non option like characteristics you factored into your valuation include;

· time of expiry,

· performance hurdles,

· interest rates,

· dividend yield and

· share price volatility.

Certain rights lapsed without vesting to any employees due to a failure to meet specific performance targets.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 170(10AA)

Income Tax Assessment Act 1997 Section 83A-310

Income Tax Assessment Act 1997 Section 960-410

Income Tax Assessment Regulations 1997 Regulation 83A-315.01

Reasons for decision

Issue 1

Under regulation 83A-315.01 of the Income Tax Assessment Regulations 1997, for unlisted rights that must be exercised within 10 years of acquisition, you can choose to value them at either:

· the market value according to its ordinary meaning, or

· the amount determined by application of the regulations.

· The market value according to its ordinary meaning must be determined where:

· an unlisted right has an exercise period greater than 10 years, or

· you choose not to use the amount determined by the application of the regulations for valuing unlisted rights.

When calculating the market value of a right, section 960-410 of the Income Tax Assessment Act 1997 (ITAA 1997) states you must disregard anything that would prevent or restrict conversion of the right to money.

For example, where the terms of an employee share scheme (ESS) impose disposal restrictions or provide for rights to be forfeited in particular circumstances, these factors should be disregarded when determining the market value.

In this case, you can choose to value your rights at either the market value according to its ordinary meaning or by application of the relevant regulations. When calculating the market value of your rights, you have included factors such as; time of expiry, performance hurdles, interest rates, dividend yield and share price volatility. However, when calculating the market value of an unlisted right, you must disregard anything which would prevent or restrict conversion of the right to money. Therefore you can not use those factors when determining the market value of your rights.

Issue 2

If you have included a discount you received under an ESS in your assessable income in relation to your ESS interests and your interests are:

· subsequently forfeited, or

· in the case of a right, forfeited, lapsed, expired or lost (without the right having been disposed of or exercised),

· you may be entitled to exclude the discount from your assessable income and receive a refund of any tax paid in relation to those interests.

For ESS interests acquired on or after 1 July 2009 you may only exclude the discount if:

· you had no choice but to forfeit or lose the ESS interests (except where the choice was to cease employment), or

· the conditions of the scheme did not have the direct effect of protecting you from a fall in the market value of the interest.

If you are entitled to exclude the discount, you are treated as never having acquired your ESS interests and Division 83A of the ITAA 1997 is taken to never have applied.

Section 170(10AA) of the Income Tax Assessment Act 1936 states there is no time limit for amending a tax return to exclude the discount from your assessable income as a result of your ESS interests being forfeited.

In this case, certain rights were forfeited as a result of a failure to attain necessary performance targets. The rights were not forfeited as a result of a choice made by you. Therefore you will be entitled to amend your tax return to exclude the discount received in relation to those rights. Subsequently, if your other rights are forfeited as a result of a failure to attain necessary performance targets and you had no choice but to forfeit your rights, you will be entitled to amend your tax return to exclude the discount received in relation to those rights. There is no time limit for amending your tax return in this case.

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