Edited version of private ruling

Authorisation Number: 1011766165167

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Ruling

Subject: Capital gains tax - cost base of employee shares

Question 1: Is the first element of cost base of the employee share scheme shares issued at a discount, the market value of the shares when cessation time occurs?

Answer: Yes.

Question 2: Is the first element of the cost base of the loan shares, not issued at a discount, equal to the amount paid?

Answer: Yes

Question 3: Is the first element of the cost base of the shares received under the dividend election plan (DEP) (bonus shares) the market value of the shares on the day they were issued?

Answer: No.

Question 4: Is the first element of the cost base of the shares you acquired via a dividend re-investment plan, the market value of the share on the day the dividend was paid?

Answer: Yes.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

You are employed by a large company (the company).

From 1997 you have acquired shares under a number of the company employee share plans.

The employee share scheme plans you participated in are:

· the company Share Incentive Plans (SIP) - discount shares

· the company Employee Share and Option Plan - loan shares

You acquired the loan shares under an interest free loan.

You did not pay anything to acquire the SIP shares.

You have not made any elections under section 139E elections of the Income Tax Assessment Act 1936 (ITAA 1936) in respect of any of the shares that you acquired.

You have participated in DEP, dividend re-investment plan (DRP) and the company's Bonus Share Plan.

You are disposing your shares as required under your divorce settlement.

You have provided copies of documentation to support your application and these documents are to be read with and forms part of the scheme for the purpose of this ruling.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 139E
Income Tax Assessment Act 1936 Section 139CD
Income Tax Assessment Act 1936 Section 139C
Income Tax Assessment Act 1936 Section 139CA
Income Tax Assessment Act 1936 Section 139B
Income Tax Assessment Act 1936 Section 139CC
Income Tax Assessment Act 1936 Section 139G
Income Tax Assessment Act 1936 Section 139CE
Income Tax Assessment Act 1936 Section 44
Income Tax Assessment Act 1936 Section 45C
Income Tax Assessment Act 1997 Section 130-80
Income Tax Assessment Act 1997 Section 104-10
Income Tax Assessment Act 1997 Section 110-25
Income Tax Assessment Act 1997 Section 116-20
Income Tax Assessment Act 1937 Section 114-1
Income Tax Assessment Act 1997 Section 115-5
Income Tax Assessment Act 1997 Section 130-20

Reasons for decision

An employee acquires shares under an employee share scheme if the shares are acquired in respect of, or in relation directly or indirectly to any employment of the employee and the consideration for the acquisition is less than the market value of the shares at the time of acquisition.

Qualifying shares acquired under an employee share scheme (ESAS)

You acquire shares under an employee share scheme when they are acquired in respect of your employment and the consideration paid for their acquisition is less than the market value of the shares at the time you acquired them.

An election under section 139E of the ITAA 1936 can be made by an employee in respect of the qualifying shares. The effect of making an election is that the discount given in respect of the qualifying shares is included in the employee's assessable income in the year of acquisition.

If an election is not made, the discount is included in the employee's assessable income when cessation time occurs. As you did not make an election, you are required to include the discount in your assessable income in the year in which cessation time occurs.

The shares you acquired under the company's Share Incentive Plan (SIP) are qualifying shares.

Cessation time

The cessation time for shares with restrictions preventing disposal or conditions resulting in forfeiture, acquired under an employee share scheme is the earliest of the following:

· when the shares are disposed of 

· the later of when the disposal restrictions cease and the lapsing conditions expire in relation to the shares 

· when the employees employment ceased with their employer, or 

· ten years from the date of acquisition of the shares.

The method of calculating the discount at cessation time will depend on whether you dispose of the shares within 30 days of the cessation time.

If the shares are disposed of at arm's length within 30 days of the cessation, the discount is calculated as the amount of any consideration you received for their disposal less any consideration you provided to acquire the shares.

This discount is included in the employee's assessable income in the year in which cessation time occurs.

If the shares are not disposed of at arm's length or within 30 days of the cessation time, the discount is calculated at the market value of the share at cessation time less any consideration you provided to acquire the share.

Loan shares acquired under an ESAS

Shares are not acquired under an employee share scheme where:

· the consideration for their acquisition is equal to, or more than, their market value at the time of acquisition, or

· the shares are obtained by the exercise of rights under an employee share scheme.

Where non discount shares are acquired they are not subject to Division 13A of ITAA 1936. However, the rest of the provisions of the ITAA 1936 and Income Tax Assessment Act 1997, including the capital gains tax (CGT) provisions will apply to these shares.

The shares you acquired under the company's Employee Share and Option Plan (ESOP) are non discounted shares as these shares were allocated to you at their market value. Accordingly they will be subject to the CGT provision.

Bonus shares (DEP)

If you receive bonus shares in relation to shares that are acquired on or after 20 September 1985, the bonus shares are taken to have been acquired on the date that you acquired your original shares.

The cost base of the bonus shares is calculated by apportioning the cost base of the original shares over both the bonus shares and original shares. The bonus shares will take on part of the cost base of the original parcel and they will be subject to the CGT provisions upon a CGT event occurring, such as a disposal.

If you acquired your original shares at different times, that is your shareholding comprise of different parcels of shares, you are required to apportion the bonus shares over the different parcels of shares.

The bonus shares that were issued to you under the company's BSP or DEP are required to be apportioned over your various parcels of shares acquired under the various plans.

For example:

Bill received 100 bonus shares on 28 May 2003. At this point Bill's shareholding comprised of two parcels of shares, the original 20 shares and the 980 shares he purchased on 15 April 2003. The first parcel of shares represents 2% (20 out of 1000) of his shareholding and 2% or 2 of the bonus shares will be attributable to this parcel. The second parcel of shares represents the remaining 98% (980 out of 1000), therefore, 98% or 98 bonus shares will be attributable to this parcel.

The total effect is that the cost base of 1,000 shares is apportioned over the 1,100 shares in Bill's shareholding as a result of the bonus share issue.

This methodology will be of assistance in adjusting the cost base of your shareholding after the issue of bonus shares you received over the years under the company's BSP and DEP share plans.

Dividend Re-investment Plan (DRP)

Under a DRP you can choose to use the dividend to acquire additional shares in the company instead of receiving a cash payment. These shares are usually issued at a discount on the current market price of the shares in the company.

For CGT purposes, if you participate in a DRP you are treated as if you had received a cash dividend and then used the cash to buy additional shares.

Under a DRP each share that is acquired after 20 September 1985, is subject to CGT. The cost base of the new shares includes the price you paid to acquire them, which would be the amount of the dividend used to purchase the shares plus any second element costs.

Therefore, the above applies to any shares that you acquired under the company's DRP.

How CGT applies - discount shares

If an arm's length transaction such as a disposal (CGT event A1) happens within 30 days of the cessation time, the capital gain or capital loss is disregarded.

If the shares are not disposed of with 30 days of cessation time in an arm's length transaction the first element of the cost base/reduced cost base of the shares is their market value at cessation time. Where a CGT event happens in relation to the shares, the capital gain or capital loss is calculated in accordance with the rules applicable to that event.

How CGT applies - loan shares

Upon disposal of these shares, a CGT event will occur (CGT event A1) so the CGT rules applicable to that event apply.

Working out your capital gain or capital loss

There are three methods of calculating your capital gain, the indexation method, the discount method and the 'other' method.

For shares that you acquired and disposed of within 12 months of acquisition you must use the 'other' method to calculate your capital gain.

There are two methods available to you to calculate your capital gain for shares that you acquired prior to 21 September 1997. The two methods are the indexation method or the discount method.

For the indexation method to apply:

· a CGT event happened to your assets you acquired before 21 September 1999, and

· you owned the asset for 12 months or more.

You may also choose to use the discount method to calculate the discount on the shares that you acquired before 21 September 1999, as you are disposing of these shares after 21 September 1999. However, you cannot choose both methods, you must choose one or the other.

You can use the discount method to calculate your capital gain for the shares you acquired after 19 September 1999 as:

· you are an individual,

· a CGT event will happened to an asset you own

· the CGT event happened after 21 September 1999

· you acquired the asset at least 12 months before the CGT event

For more information of these methods please see the enclosed document or our website - www.ato.gov.au.