Edited version of private ruling

Authorisation Number: 1011728647826

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Ruling

Subject: Income - Receipt of shares in relation to services provided to a company

Question

Is the value of the shares received in relation to services provided to a company included in your assessable income at the time of receiving the shares under Division 13A of the Income Tax Assessment Act 1936 (ITAA 1936) ?

Answer

Yes, in the financial year you were allotted the shares.

This ruling applies for the following period

Year ending 30 June 2007

Year ending 30 June 2008

Year ending 30 June 2009

Year ending 30 June 2010

Year ending 30 June 2011

The scheme commenced on

1 January 2007

Relevant facts

From mid 20XX you worked for Company A and produced a particular product,

You worked at a reduced rate and produced the product critical to the project in your job..

You worked on the project until the following year and then did not find any work for a number of months.

Then you were approached by Person A and you were asked to come and do some more urgent work to get a new company going. They recognised that you had provided essential and major contribution to the intellectual property of the new company.

They were prepared to give you $XX worth of shares in a private company, that would be set aside for you at the time and after one year you would be entitled to the shares.

These shares were not an incentive but basically a payment that you had foregone in the previous years and payment for the critical work done between mid 20XX and the particular date in the following year.

You are now entitled to the shares however you have not had them transferred into your name to date.

The shares were issued to you via a verbal agreement and there was no written agreement in relation to the share issue.

At the time that you acquired the shares you were a contractor and not an employee of the company.

You did not receive any other payment in relation to the work carried out to assist with the new company.

You were not issued rights to acquire the shares; rather the shares were put aside for you.

There was a requirement that you continued providing services to the company for a minimum of twelve months prior to being able to access the shares.

There were no other restrictions placed upon the shares.

You were not required to pay anything to acquire the shares.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1936 Subsection 139C(2)

Income Tax Assessment Act 1936 Subsection139G(b)

Income Tax Assessment Act 1936 Division 13A

Income Tax Assessment Act 1997 Section 112-75

Income Tax Assessment Act 1997 Section 130-80(2

Reasons for decision

Division 13A of the ITAA 1936 looks at the taxation consequences for shares issued under employee share schemes before 1 July 2009.

Shares are issued under an employee share scheme if the shares are acquired by the taxpayer in respect of, or for or in relation directly or indirectly to, any services provided by the taxpayer or an associate of the taxpayer (see subsection 139C(2) of the ITAA 1936).

The shares allocated to you were in respect of services being provided to the company and therefore the shares and the taxation consequences are determined under Division 13A of the ITAA 1936.

As you have received the shares for no consideration, you need to include the value of the shares in your assessable income.

In order to determine when the value must be included in your assessable income it is first necessary to determine if the shares are qualifying shares for the purposes of Division 13A of the ITAA 1936.

One of the criteria for a share being a qualifying share for the purposes of Division 13A of the ITAA 1936 is that the share is issued in your employer or the holding company of your employer. As you are an independent contractor and therefore not an employee of the company, the shares allocated to you will not be qualifying shares for the purposes of Division 13A of the ITAA 1936.

The consequence of this is that the value of the shares must be included in your assessable income at the time the shares are acquired.

Section 139G of the ITAA 1936 determines when shares are acquired for employee share purposes. Subsection 139G(b) of the ITAA 1936 states that you acquire a share when someone else allots that share to you.

Therefore, as the shares were allotted to you early in 20XX the total value of the shares will need to be included in your income tax return for the year ended 30 June 20XX.

Note: As you will include the total market value of the shares in your income tax return in the relevant years, for capital gains tax purposes you are taken to have acquired those shares at that time for the market value. Therefore the first element of the cost base when calculating future capital gains tax consequences will be the amount included in your income tax return (Section 130-80(2) of the Income Tax Assessment Act 1997).

Note: If the amount has not already been included in your 20XX income tax return you will need to request an amendment of that assessment unless you choose not to follow the ruling. Please refer to the attached fact sheet.