Edited version of private advice

Authorisation Number: 5010073174960

Date of advice: 26 February 2021

Ruling

Subject: Deductions and employee share scheme

Question

Are you entitled to claim a deduction for the Expenses for the valuation of the market value of your employee share scheme shares in the income year they were incurred under section 25-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No. However the Expenses will be included in the cost base when calculating the employee share scheme discount in the income year when the deferred taxing point occurred for your ESS interests.

This ruling applies for the following period

1 July 20XX to 30 June 20XX

Relevant facts and circumstances

You participated in an employee share scheme (ESS) offered by your employer, Company A.

Under the ESS you were granted ESS interests during the 20XX-XX income year.

Company A obtained advice prior to issuing the ESS statement for the income year in which your ESS interests were granted, and based the advice received the following assumption in relation to the ESS interests' valuation was made:

•         'Note, it is the details which must be at arm's length, not the parties to the transaction'

•         Consistent with the Australian Taxation Office guidance, shares are relatively liquid and do not exhibit significant price volatility.

Company A issued an ESS statement to you near the end of the income year in which the ESS interests were granted which indicated that the ESS was a taxed upfront scheme - not eligible for a reduction and the ESS discount amount of $X,XXX,XXX.

You engaged the services of Company X to undertake a review of your ESS interests to determine their market value a number of years after the ESS interests had been granted and incurred costs totalling $XX,XXXX (the Expenses) to undertake the valuation.

Based on the findings of Company X's valuation, Company A issued an amended ESS statement for the 20XX-XX income year to you with a reduced ESS discount amount in relation to your Taxed upfront scheme - not eligible for reduction ESS.

Company A had reported your ESS discount amounts to the ATO in relation to both the original ESS statement and the amended ESS statement as being in relation to a deferral ESS.

Company A have confirmed that the relevant ESS was a deferral ESS.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 25-5

Income Tax Assessment Act 1997 Subdivision 83A-B

Income Tax Assessment Act 1997 Subdivision 83A-C

Reasons for decision

You engaged the services of Company X in relation to determining the market value of your ESS interests and incurred the Expenses.

We will consider how the Expenses should be treated as follows:

Deductions for tax-related expenses

Section 25-5 of the ITAA 1997 specifically deals with tax-related expenses and when you can claim a deduction in relation to them.

Subsection 25-5(1) of the ITAA 1997 states:

You can deduct expenditure you incur to the extent that it is for:

(a)  managing your tax affairs, such as fees paid to a registered tax agent for preparing an income tax return, fees paid to a solicitor or registered tax agent for tax planning advice and costs incurred in disputing an assessment; or

(b)  complying with an obligation imposed on you by a Commonwealth law, insofar as that obligation relates to the tax affairs of an entity; or

(c)   the general interest charge or shortfall interest charge; or

(ca) penalty under Subdivision 162-D of the GST Act; or

(d)  obtaining a valuation in accordance with section 30-212 or 31-15 of the ITAA 1997 (Both of the sections relate to valuations provided by the Commissioner).

ESS discount amount to be included in assessable income

Section 83A-25 of the ITAA 1997 provides that the ESS discount in relation to taxed upfront ESS is included in your assessable income in the income year in which the ESS interest is acquired.

Section 83A-110 of the ITAA 1997 determines the ESS discount amount to be included in your assessable income at the ESS deferred taxing point.

Subsection 83A-110(1) of the ITAA 1997 states:

Your assessable income for the income year in which the *ESS deferred taxing point for the *ESS interest occurs includes the *market value of the interest at the ESS deferred taxing point, reduced by the *cost base of the interest.

The second part of the formula for calculating the assessable amount uses the capital gains concept of 'cost base', which is defined in Subdivision 110-A of the ITAA 1997 in the capital gains tax provisions.

Capital gains tax cost base

Section 110-35 of the ITAA 1997 relates to incidental costs that are included in the second element of the cost base by subsection 110-25(3).

Subsection 110-35(6) of the ITAA 1997 deals with costs relating to valuation or apportionment in relation to the capital gains tax provisions.

Application to your situation

The Expenses were incurred several income years after the deferred taxing point for the relevant ESS interests had occurred.

When determining whether you can claim a deduction for the Expenses in the income year they were incurred it must be determined if that is the relevant income year, with the alternative outcome being to adjust the calculation of the assessable discount in the income year in which the deferred taxing point occurred for the relevant ESS interests occurred.

If the ESS interests had been granted under a taxed upfront ESS, with the taxing point occurring in the same income year, then you would have been eligible to claim a deduction for expenses incurred in the same income year in relation to the valuation of the market value of the ESS interests in that income year.

However, the ESS interests were acquired under a deferral ESS, with the deferred taxing point occurring in an income year several years prior to the Expenses being incurred. As the Expenses relate to the valuation of the market value of your ESS discount in the earlier income year, the earlier income year is the relevant income year and not the later income year you incurred the Expenses.

The Expenses are relevant when calculating the ESS discount amount assessable to you in the earlier income year when the deferred taxing point occurred and should be used in the calculation. Accordingly, you cannot claim a deduction for the Expenses in the income year in which they were incurred.

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).