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Ruling

Subject: Cost base of an employee share scheme

Question and Answer

1. Is the cost base of the shares you acquired as part of an employee share scheme $X?

Yes

2. Have you made a capital loss of $Y on the options that you could not exercise?

Yes

This ruling applies for the following period

Period ended 30 June 2009

The scheme commenced on

1 July 2008

Relevant facts and circumstances

You participated in an employee share scheme (ESS)

You were granted x options which could be exercised after 5 years if you remained with the employing company for the full 5 years.

Each right/option allocated to you had a value of $Y.

The cost to exercise each right was $E

You made a valid election, under section 139E of the ITAA 1936, to have your rights discount taxed when the rights were issued.

You included the discount for the rights in your assessable income the year which the election was made.

You ceased employment during 2009 which was 4 years into the 5 year ESS plan.

Your revised entitlement, under the scheme, as a result of the cessation time was to acquire a lesser number of shares. Consequently, you lost some rights.

Later on in 2009 you exercised your entitlement and acquired ordinary shares.

Sometime after that, you sold a parcel of shares for $A

The sale of your shares incurred a brokerage cost of $B.

Relevant legislative provisions

Income Tax Assessment Act 1936

Section 139B

Section 139E

Section 139CC

Section 160ZYB

Reasons for decision

When a taxpayer acquires a share or right under an employee share scheme (ESS), the discount given in relation to the share or right is included in the assessable income of the taxpayer [section 139B(1)of the Income Tax Assessment Act 1936(ITAA 1936)]. The year of income in which the discount is assessable is as follows:

· If the share or right is a qualifying share or right, the general rule is that the discount is not assessable until the year of income in which the ``cessation time'' occurs (section 139B(3) of the ITAA 1997). In broad terms, the cessation time means the time when the share or right is disposed of, or when relevant restrictions on disposal are lifted, or the employment ceases, or the period of 10 years expires.

· As an exception to this general rule, a taxpayer may instead elect in the case of qualifying shares or rights that the discount be assessable in the year of acquisition under sec 139B(2) of the ITAA 1936, rather than in the year in which the cessation time occurs. This election applies to all qualifying shares or rights acquired by the taxpayer in the income year to which the election applies (sec 139E of the ITAA 1936).

You have indicated that you made a valid election under section 139E of the ITAA 1936 to have your share discount taxed upfront, therefore section 139B of the ITAA 1936 will apply.

As section 139B(2) of the ITAA 1936 applies, your discount is assessable in the year of acquisition, the assessable discount is calculated as being equal to the market value of the share or right at the time of acquisition, less any consideration paid or given by the taxpayer (sec 139CC(2) of the ITAA 1936). For CGT purposes, the taxpayer is treated as having paid consideration equal to the market value of the share or right at the time of acquisition (or the actual consideration paid if this exceeds the market value) (sec 160ZYB(2) of the ITAA 1936). This amount is deemed to have been paid at the time of acquisition.

Having determined the year of income in which the discount is assessable, the CGT implications for the rights in question need to be determined with consideration to the following stages of acquisition

1. the acquisition of the x rights and their associated discount.

2. the loss of rights as a result of your employment ceasing.

3. the exercising of your rights, converting those rights into ordinary shares.

4. the sale of your ordinary shares.

You acquired rights (with a market value of $Y each) at the commencement of the plan in 2005. The plan was to carry through until 2010 (5 years).

As you were retrenched from the ESS issuing company in January 2009 your entitlement crystallised early. You were advised that you were entitled to a lesser number rights. The remaining F rights were forfeited as a result of your loss of employment.

Your capital loss from this event is:

F rights x $Y = $Loss

The cost base of the shares you acquired is the cost of your rights ($Y each) plus the cost of exercising the rights ($E each).