Edited version of private ruling

Authorisation Number: 1011690719326

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Ruling

Subject: Employee share scheme - Market value of unlisted rights

Question and answer

Is the method specified in the Income Tax Assessment Regulations 1997 Division 83A an acceptable method of valuing your performance rights as at the date you were made redundant?

Yes.

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You were an employee of a large company until you were made redundant during the income year.

While you were employed by the company, you were granted unlisted performance rights under their Performance Rights Grant for employees.

You did not pay anything to acquire these rights, which were granted to you between the relevant years.

Each performance right entitled you to acquire one ordinary share in the company, providing that certain company performance hurdles were met on specified dates.

The exercise price of the performance rights you acquired are $1.00 per batch (irrespective of how many performance rights are exercised in that batch).

The performance rights are to expire 66 months after the grant date if the performance hurdles are met.

The first tranche of performance rights that were granted to you have already lapsed due to the company failing to meet the performance hurdle.

You did not make an election under section 139E of the Income Tax Assessment Act 1936 (ITAA 1936) for either of the income years that you acquired performance rights.

You are aware that you have to work out the market value of the performance rights as at the date you were made redundant but are unsure of the appropriate method of valuing these rights. You believe that the market value of the performance rights should be based on the following data:

The company's share price as at the date you were made redundant

The probability of the performance rights vesting

The associated risks, and

That the performance rights are ineligible for dividends.

You have provided certain documents that are to be read with and form part of the description of the scheme for the purpose of this ruling. They provide more detailed information.

Relevant legislative provisions

Income Tax Assessment Act 1936 - Former Division 13A

Income Tax Assessment Act 1997 - Division 83A

Income Tax Assessment Act 1997 - Section 83A-315

Income Tax Assessment Act 1997 - Section 960-410

Income Tax Assessment Regulations 1997 - Regulation 83A-315.01

Income Tax Assessment Regulations 1997 - Regulation 83A-315.02

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Summary

The method specified in the Income Tax Assessment Regulations 1997 Division 83A is an acceptable method of valuing your performance rights as at the date you were made redundant.

Under this method, the market value of your performance rights will be equal to the market value of the total number of shares that you could acquire by exercising all of your performance rights less $1.00 as the exercise price.

Detailed reasoning

Rights acquired under an employee share scheme were previously subject to Division 13A of the ITAA 1936. However legislative changes mean that rights or shares for which the cessation time had not occurred as of 1 July 2009 are taxed in accordance with Division 83A of the Income Tax Assessment Act 1997 (ITAA 1997).

As you acquired your rights before 1 July 2009 and the cessation time happened after 1 July 2009 your rights are considered to be transitional interests and will be subject to some of the rules under both the former Division 13A of the ITAA 1936 and the new Division 83A of the ITAA 1997.

The timing of when you need to work out how much to include in your assessable income as the discount is determined using the former Division 13A of the ITAA 1936. You are assessable at the cessation time, which happened when you were made redundant.

How much is assessable is worked out using the new Division 83A of the ITAA 1997. It refers the calculation to the Income Tax Assessment Regulations 1997.

Under the Income Tax Assessment Regulations 1997, you can choose to value unlisted rights that must be exercised within 10 years of acquisition at either:

their market value according to its ordinary meaning, or

the amount determined by application of the regulations.

The amount determined by application of the regulations

Where you choose to use the value determined by using the regulations to work out the market value of each of your performance rights, the value will be the greater of:

the market value, on the day, of the share that you may acquire by exercising the right, less the lowest amount that you must pay to exercise the right to acquire the beneficial interest in the share (that is, the intrinsic value), and

the value determined according to the tables in the regulations. If the exercise price is nil or cannot be determined then the value of the right is equal to the market value of the underlying share on that day.

In your circumstances, the exercise price of the rights you acquired was $1.00 per batch (all could be exercised or some only could be exercised for $1.00). This means the lowest amount that you must pay to exercise the right was equal to $1.00 divided by the maximum number of rights you could exercise in one batch.

The market value according to its ordinary meaning

As stated above, you are also entitled to choose to work out the market value of the performance rights according to the ordinary meaning of the term market value.

However, section 960-415 of the ITAA 1997 provides that in working out the market value of a non cash benefit, you disregard anything that would prevent or restrict the conversion of the benefit to money. An interest acquired under an employee share scheme is a non cash benefit.

Therefore, the vesting conditions, performance hurdles and other restrictions are not taken into account when calculating the market value of a right acquired under an employee share scheme.

Where the exercise price of the right is zero, we would expect that the market value of the right will equal the market value of the underlying share. Where you must pay a token amount to exercise a right and it varies depending on how many rights you exercise, the exercise price is taken to be the amount you would reasonably have been expected to pay per right to exercise each right.