Edited version of your written advice

Authorisation Number: 1051244082301

Date of advice: 7 July 2017

Ruling

Subject: Employee share scheme

Issue 1

Question 1

Is the assessable discount derived by you on cessation of employment something other than the underlying market value of the shares at that time?

Answer

No

Question 2

Can the market value be calculated by a method not listed in subregulation 83A-315.01(1) of the Income Tax Assessment Regulations 1997?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 201C

The scheme commences on:

July 201B

Relevant facts and circumstances

You were employed by Company A and participated in the Equity Incentive Plan.

You were granted a number of share rights in early 201A under the plan. These rights were due to vest in early 201C.

You were granted a number of share rights in early 201B under the plan. These rights were due to vest in early 201D.

You were made redundant in mid 201B and considered a 'good leaver’.

Company A exercised their discretion in respect to the 201A rights and the shares were vested to you in 201C.

Company A exercised their discretion in respect to the 201B rights and the shares were vested to you in early 201D.

Company A has provided you with a valuation of the assessable discount to include in your 201C return.

Relevant legislative provisions

Income Tax Assessment Act 1997 subdivision 83A-C,

Income Tax Assessment Act 1997 subdivision 83A-B,

Income Tax Assessment Act 1997 section 83A-110,

Income Tax Assessment Act 1997 section 83A-120,

Income Tax Assessment Act 1997 section 83A-315,

Income Tax Assessment Act 1997 section 995-1,

Income Tax Assessment Act 1997 subdivision 960-S,

Income Tax Assessment Act 1997 section 960-410,

Income Tax Assessment Act 1997 section 960-412,

Income Tax Assessment Act 1997 section 960-415,

Income Tax Assessment Regulations 1997 division 83A and

Income Tax Assessment Regulations 1997 regulation 83A-315.

Reasons for decision

The assessable discount to be included in your assessable income is the market value of the rights at the deferred taxing point reduced by the cost base of the rights. The market value to be included can be calculated by either method outlined in subregulation 83A-315.01(1) of the Income Tax Assessment Regulations 1997 (ITAR 1997).

As outlined in Class Ruling CR 20XX/YY Income tax: Company A Equity Incentive Plan subdivision 83A-C of the Income Tax Assessment Act 1997 (ITAA 1997) applies to the rights granted under the plan and Subdivision 83A-B of the ITAA 1997 does not apply.

According to paragraph 21 of CR 20XX/YY if the rights granted to participants under the Company A Limited Equity Incentive Plan are satisfied by the issue of shares then section 83A-340 of the ITAA 1997 applies to those rights. Those rights will be considered Employee Share Scheme (ESS) interests acquired under an ESS for the purposes of Division 83A under paragraph 22 of CR 2012/12.

Paragraph 18 of CR 20XX/YY states the rights of participants who cease employment prior to vesting of any awarded Rights due to death, total and permanent disablement, redundancy, retirement or termination by agreement will not lapse and will continue to be held by the participants unless otherwise determined by the Board. Participants in these circumstances are referred to as 'good leavers'. Under paragraph 25 of 20XX/YY the ESS deferred taxing point for the rights of a participant who left Company A as a 'good leaver’ and retained their rights that are satisfied in Company A shares will be determined in accordance with section 83A-120 of the ITAA 1997.

As outlined in paragraph 71 of 20XX/YY a good leaver whose rights are settled with shares will include the discount in their assessable income for the year in which they ceased employment unless subsection 83A-120(3) of the ITAA 1997 applies. This is because the cessation of employment must be the first time mentioned in subsections 83A-120(4) to (7) of the ITAA 1997.

Paragraph 42 of 20XX/YY states participants in the plan will need to include in their assessable income the market value of the rights at the deferred taxing point reduced by the cost base of the rights. This amount needs to be included in the income year in which the deferred taxing point occurs in accordance with section 83A-110 of the ITAA 1997.

According to Paragraph 83A-110(1) of the ITAA 1997 your assessable income for the income year in which the ESS deferred taxing point occurs includes the market value of the ESS interest reduced by the cost base of the ESS interest. Subsection 83A-315 of the ITAA 1997 defines market value for the purposes of the division as the amount specified in division 83A of ITAR 1997.

Subregulation 83A-315.01(1) of the ITAR 1997 states that when determining the value of an unlisted right the amount the taxpayer may choose either the market value of the right or the amount determined by the application of regulations 83A-3.15.02 to 83A-315.09 of the ITAR 1997. Effectively an individual taxpayer can choose to either value the rights by adopting market value as defined by section 995-1 of the ITAA 1997 or they can substitute the amount determined by the application of regulation 83A-315.02 of the ITAR 1997.

The amount determined by the application of the regulations is specified in regulation 83A-315.02 of the ITAR 1997 which states:

Valuing Unlisted Rights

(1) If a right is not quoted on an approved stock exchange on a particular day, the value of the right is the greater of:

(a) the market value, on the day, of the share that may be acquired by exercising the right, less the lowest amount that must be paid to exercise the right to acquire the beneficial interest in the share; and

(b) subject to regulation 83A-315.03, the value determined in accordance with regulations 83A-315.05 to 83A-315.09.

(2) In determining the value of a right, anything that would prevent or restrict conversion of the right to money is to be disregarded.

If the exercise price of the options is nil then the application of regulation 83A-315.03 will result in the assessable discount being the market value of the share on the day. This is because the value of the right is at a minimum the value of the share that may be acquired by exercising the right less the lowest exercise price which is nil in this case.

When applying the regulations to the value of unlisted rights then the value is determined with reference to subregulation 83A-315.02(2) of the ITAR 1997. This subsection makes it clear that when determining the value of the right we must disregard anything that would prevent or restrict the rights conversion into money (e.g. disposal conditions on the right or subsequent share, vesting conditions etc.).

The other option available to a taxpayer is valuing the assessable discount by using the defined meaning of market value from section 995-1 of the ITAA 1997. Market value is defined by this section as having a meaning affected by subdivision 960-S of the ITAA 1997. Essentially this means that when calculating the market value it must be calculated in accordance with subdivision 960-S of the ITAA 1997.

The relevant provisions for calculating market value are sections 960-410, 960-412 and 960-415 of subdivision 960-S of the ITAA 1997. Section 960-410 of the ITAA 1997 states that when working out the market value of a non-cash benefit (such as a right), disregard anything that would prevent or restrict conversion of the benefit to money. For example, where the terms of an ESS impose disposal restrictions or provide for rights to be forfeited in particular circumstances, these factors should be disregarded when determining the market value. Section 960-412 has no application because the Commissioner has not approved any methods which apply to the valuation of unlisted rights. Section 960-415 merely reinforces that any calculation of market value must be performed in accordance with Subdivision 960-S of the ITAA 1997. Company A has provided you with a valuation as at early mid 201B calculated in accordance with these methods.

The treatment of rights issued under an ESS is predicated on including an amount in relation to the discounted value of a right acquired in relation to employment. However in the event that the right is lost or forfeited (including where it lapses) then it is treated as having never been acquired and the tax return amended to no longer include the assessable discount as discussed in section 83A-310 of the ITAA 1997. Given that the amount will be disregarded under all the circumstances relevant to the conditions and restrictions it makes sense to ignore them when valuing the right. The only exception to this rule is when the scheme is specifically structured to directly protect the employee from downside market risk as outlined in subparagraph 83A-310(1)(c)(ii) of the ITAA 1997.

Application to your circumstances

You were made redundant from Company A in mid 201B and were considered as a 'good leaver’ as defined in paragraph 18 of CR 20XX/YY. This is the earliest of the dates specified in Section 83A-120 of the ITAA 1997 so the deferred taxing point is in mid 201B.

You were considered a 'good leaver’ so you continued to hold the rights granted to you in accordance with paragraph 18 of CR 20XX/YY. The rights granted to you in early 201A vested to you in early 201C and the rights granted to you in mid 201B vested to you in early 201D.

Therefore you will need to include in your assessable income for the year ended 30 June 201C the market value of the rights at the deferred taxing point reduced by the cost base of the rights. The market value to be included can be calculated by either method outlined in subregulation 83A-315.01(1) of the ITAR 1997.

If you elect to value the rights at the market value the amount is calculated with respect to section 995-1 and subdivision 960-S of the ITAA 1997. As the rights are a non-cash benefit you must disregard anything that would prevent or restrict conversion of the benefit to money when determining the market value. This means that you must ignore disposal restrictions and vesting conditions when determining the market value of rights.

If you elect to value the rights in accordance with the application of regulation 83A-315.02 of the ITAR 1997 the value is determined with reference to subregulation 83A-315.02(2) of the ITAR 1997. This subregulation makes it clear that when determining the value of the right you must disregard anything that would prevent or restrict the rights conversion into money (e.g. disposal conditions on the right or subsequent share, vesting conditions etc.).

As the exercise price of the rights is nil, either method will result in the same assessable amount which is the same figure that has been provided by Company A. This amount must be included in your assessable income for the year ended 30 June 201C.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).