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Subject: capital gains tax - employee share scheme

Question:

Will the cost base of your Company A shares be the market value of the shares on the date the company's shares were floated?

Answer:

No.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts and circumstances

You were a resident of a foreign country where you were employed by Company A.

You participated in an employee share scheme (ESS) offered by Company A and were granted a number of ESS options.

Your Company A options vested prior to you becoming an Australian resident for tax purposes.

You became an Australian resident a number of years after you were granted the ESS options.

Company A was listed a number of years later.

You exercised your Company A options and paid consideration to exercise the options.

You disposed of your Company A shares shortly after the options were exercised.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 130-83(2)

Income Tax Assessment Act 1997 Subsection 130-83(3)

Income Tax Assessment Act 1997 Section 855-45

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 Section 83A-120

Income Tax Assessment Act 1997 Section 83A-125

Income Tax (Transitional Provisions) Act 1997 Subdivision 83A-5

Income Tax Assessment Act 1936 Section 139A

Income Tax Assessment Act 1936 Subsection 139B (2A)

Income Tax Assessment Act 1936 Section 139CB

Reasons for decision

If an individual becomes an Australian resident for capital gains tax (CGT) purposes, special cost base and acquisition rules apply in respect of each CGT asset owned by the taxpayer just before becoming a resident.

Under the special cost base rule, the first element of the cost base and reduced cost base of an asset at the time the taxpayer becomes a resident is its market value at that time. Under the special acquisition rule, the taxpayer is treated as having acquired the asset at the time of becoming a resident.

However, special rules may apply where an inbound resident owns employee shares or options.

Where an inbound resident owns a qualifying share or option for which the cessation time is yet to happen, the cost base of the share or option will be its market value at the subsequent cessation time. These rules apply to CGT events that happen on or after 26 June 2005.

With effect from 1 July 2009, where the taxation of the discount under an employee share scheme (ESS) interest is deferred and the ESS deferred taxing point for that interest has not arisen, the ESS interest is treated as having been acquired for its market value at the ESS deferred taxing point.

In your case, you were granted a number of Company A options while a foreign resident. You became an Australian resident a number of years later. As a cessation time in relation to your Company A options had not occurred as at the date you became an Australian resident, the CGT provisions do not apply to your Company options.

Therefore, the cost base of your Company A options is not the market value of your options on the date you became an Australian resident, or the market value of the shares when Company A floated its shares. Your Company A shares will be treated as having been acquired for their market value on the date the deferred taxing point occurred during the 2010-11 income year.