Edited version of private advice

Authorisation Number: 1051782422438

Date of advice: 20 November 2020

Ruling

Subject: Employee share schemes - deferred taxing point - discount

Question

Can the sale value of the shares granted under an employee share scheme (ESS) be declared as assessable income instead of the market value of the shares calculated on the day your employment ended?

Answer

No

This ruling applies for the following period

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You were employed by Company B which is a subsidiary of Company A, a foreign listed company.

You participated in your employer's ESS and received ESS interests under deferral schemes.

Your employment ended and you continued to hold the ESS interests granted to you. These ESS interests vested to you several months after your employment ended.

At the vesting date the ESS interests were subject to genuine disposal restrictions and owing to these trading restrictions you were unable to dispose of your ESS interests prior to a specified date during the following year.

You sold your ESS interests shortly after the trading restrictions lifted.

You received an ESS statement from Company B for the year ending 30 June 20XX which outlined that the ESS discount from deferral schemes totalled $XXX,XXX, with the ESS discount amount calculated using the market values relating the to date your employment ended.

Relevant legislative provisions

Income Tax Assessment Regulations 1997 Division 83A

Income Tax Assessment Act 1997 Subdivision 83A-C

Income Tax Assessment Act 1997 Section 83A-105

Income Tax Assessment Act 1997 Section 83A-110

Income Tax Assessment Act 1997 Section 83A-115

Income Tax Assessment Act 1997 Section 83A-120

Reasons for decision

Summary

The ESS discount amount from deferral schemes should be calculated using the market value on the date the deferred taxing point in relation to your ESS interests occurred, and not the market value of the shares when they were sold.

Detailed reasoning

Employee share schemes

The ESS provisions are contained in Division 83A of the Income Tax Assessment Act 1997 (ITAA 1997).

ESS interests acquired under a tax-deferred scheme will be assessed for tax purposes in the year in which the deferred taxing point (DTP) occurs. This type of scheme allows an employee to defer paying tax in relation to their ESS interests, instead of paying tax in the year the interests are acquired. In accordance with subsection 83A-110(1) of the ITAA, the amount assessed will be the market value of the ESS interests at the DTP, reduced by the cost base of the ESS interests.

The DTP is separately defined for shares in accordance with section 83A-115 of the ITAA 1997 and for rights in accordance with section 83A-120 of the ITAA 1997.

Subsections 83A-115(4) to (6) of the ITAA 1997 indicate the DTP for ESS interests that are shares is the earliest of the following:

•   When there is no real risk of forfeiture and the scheme no longer genuinely restricts disposal of the share

•   When the employment ends in respect of which the share was acquired

•   Fifteen years from the grant date (when you acquired the ESS interest)

Subsections 83A-120(4) to (7) of the ITAA 1997 indicate the DTP for ESS interests that are rights to acquire shares is the earliest of the following:

•   When there is no real risk of forfeiting the right and the scheme no longer genuinely restricts disposal of the right

•   When the employment ends in respect of which the right was acquired

•   Fifteen years from the grant date (when you acquired the ESS interest)

•   Exercise the right and the resulting share is not at a real risk of forfeiture or subject to genuine selling restrictions

Operation of subsections 83A-115(3) of the ITAA 1997 and 83A-120(3) of the ITAA 1997 can change the DTP if an ESS interest (or the share acquired on exercise of the right) is sold within 30 days of the DTP. The DTP will instead be the date of that disposal. That is, the DTP is moved to the sale date if this occurs within 30 days of the date identified by the provision. This is called the 30-day rule.

Application to your situation

For this private ruling the question is when does/did the DTP occur in relation to your ESS interests by considering the possible DTPs?

You continued to hold the ESS interests past the date that your employment ended. When your employment ended the ESS interests were unvested. The ESS interests were granted less than fifteen years ago and when the ESS interests vested you were genuinely restricted to dispose of the ESS interests. With these circumstances, cessation of employment is the first of the possible taxing points to occur as outlined in the above legislation in relation to both ESS shares and/or rights.

As the ESS interests were not disposed of within 30 days after the DTP, the 30-day rule does not apply. The date you disposed of your shares cannot be the DTP.

Therefore, you will need to include in your assessable income in the income year covered by this ruling the ESS discount amount calculated upon the ending of your employment using the market value on that date, not the market value of the shares when they were sold.

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