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Edited version of your written advice
Authorisation Number: 1012795288070
Ruling
Subject: Employee Share Scheme
Questions and answers
1. Do the Employee Share Scheme provisions under Division 13A of the Income Tax Assessment Act 1936 apply to you, when you purchased the company shares prior to 1 July 2009?
No.
2. Did a Capital Gains Tax event A1 occur when the company purchased your shares?
Yes.
3. Are you entitled to a Capital Gains Tax 50% discount on the gain you made when you sold the shares?
Yes.
This ruling applies for the following period
1 July 2013 to 30 June 2014
Relevant facts and circumstances
You are employed by the company.
The company has an employee share ownership system.
Prior to 1 July 2009 you purchased a number of ordinary shares.
An independent valuer calculates the share price every year.
All shares are purchased at the full price without discount.
Only employees can become a shareholder. Selective employees are invited to purchase shares by the company board.
Each year you received a dividend from the shares.
Each year you reported the dividend in your income tax return.
You did not re-invest your dividend.
You received a redundancy from the company.
The company purchased all your shares with full price as per the Share Price announcement.
The company purchased all shares as capital (principal) and no component is dividend.
In your case the term used is 'Requisition of Shares' not a buy back scheme.
Under the company's shareholder agreement when you are no longer employed by the company you must sell your share back to the company.
You made a capital gain when you sold the shares back to the company.
Relevant legislative provisions
Income Tax Assessment Act 1936 subsection 139B(1)
Income Tax Assessment Act 1936 subsection 139B(3)
Income Tax Assessment Act 1997 subsection 100-20(1)
Income Tax Assessment Act 1997 Section 104-10
Income Tax Assessment Act 1997 subsection 115-25(1)
Does Part IVA apply to this ruling?
Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.
We have not considered the application of Part IVA to the arrangement you asked us to rule on.
Reasons for decision
Please note: Division 13A of the Income Tax Assessment Act 1936 (ITAA 1936) has been repealed and replaced by Division 83A of the Income Tax Assessment Act 1997 (ITAA 1997). However, in this case the shares were purchased prior to 1 July 2009, therefore Division 13A is the relevant Division to apply.
Question 1
Under section 139B(1) of the ITAA 1936 it states;
a taxpayer has acquired a share or right under an employee share scheme, the assessable income of the taxpayer includes the discount given in relation to the share or right.
Subsection 139C(3) of the ITAA 1936 states;
The taxpayer does not acquire a share or right under an employee share scheme if the consideration for the acquisition is equal to, or more than the market value of the share or right at the time that it is acquired.
Application to your circumstances
You purchased shares from the company on 1 April 20XX and 1 April 20YY and all the shares were purchased at the full price without discount.
Therefore, as you paid full price for the shares and did not receive a discount, Division 13A of the ITAA 1936 does not apply.
Question 2 and 3
In order to have a capital gain or loss, a Capital Gains Tax (CGT) event must occur.
Under section 104-10 of the ITAA 1997 CGT A1 happens if you dispose of a CGT asset.
You will make a capital loss if the capital proceeds you receive are less than the cost base to acquire the shares. You will make a capital gain if the capital proceeds you receive are more than the cost base to acquire the shares.
Under subsection 115-25(1) of the ITAA 1997 it states;
To be a discount capital gain, the capital gain must result from a CGT event happening to a CGT asset that was acquired by the entity making the capital gain at least 12 months before the CGT event.
Application to your circumstances
You received a redundancy and as per the company's shareholder's agreement you sold the shares you purchased from the company back to the company.
You had held the shares for more than 12 months and the sale resulted in a capital gain.
Therefore, when you sold the shares an A1 event occurred and as you had held the shares for more than 12 months you are entitled to apply the 50% discount to the capital gain on the sale of the shares.
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