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Ruling

Subject: Employee share scheme - inclusions of assessable income

Question: Is the discount amount shown on your employee share scheme statement included in your income tax return?

Answer: Yes.

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 employed by a company (the company).

You acquired shares under the company employee share scheme.

You ceased employment with the company in early 2012.

Early 2012 you wrote to the chairman of the company advising that you no longer wished to remain a shareholder and requested that all your shares be disposed of at the earliest opportunity.

Early 2012 the company advised you that the board has decided not to change the priority of order of the sale of the shares. They advised that their strategy for all shareholders is to improve liquidity next year at the latest.

The company have issued you a statement advising you that you need to include a specified amount under item 12 in your income tax return.

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

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 83A-115

Income Tax Assessment Act 1997 Section 83A-110

Income Tax Assessment Act 1997 Section 83A-105

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.

You acquire shares from an employee share schemes (ESS) if the shares are acquired, whether directly or indirectly, in relation to your employment or in relation to any services you provide. If you pay any money, or provide any consideration, to acquire the shares, the consideration must be less than the market value of the shares or rights at the time you acquire them

Generally, the discount is included in your assessable income in the income year you acquire the shares. The amount of discount is calculated at the date the shares are acquired and is the difference between the market value of the shares and the consideration, if any, that you provide to acquire them.

Tax-deferred schemes

ESS interests can be acquired under a tax-upfront ESS or tax-deferred ESS.

Under a tax-deferred scheme, the discount that you receive on the ESS interests is included in your assessable income when the ESS deferred taxing point occurs.

The scheme and employee must satisfy certain conditions and for shares, there must be a real risk of forfeiture or the shares must be acquired under certain salary sacrifice arrangements.

Deferred taxing point

The deferred taxing point for a share is the earliest of the following times:

· seven years after the employee acquired the share

· when the employee ceases the employment in respect of which they acquired the share

· when there is a real risk of forfeiture and the scheme no longer genuinely restricts the disposal of the share.

However, when there is a real risk that the benefits of an ESS interest may never be realised because the ESS interest may be forfeited, the tax will be deferred until a deferred taxing point.

The 'real risk of forfeiture' test is relevant in determining the deferred taxing point.

Real risk of forfeiture test

Whether or not a real risk of forfeiture is present will depend on facts and circumstances of each scheme and the individual circumstances of the employee.

An ESS interest acquired by an employee is at real risk of forfeiture if a reasonable person would consider that there is a real risk that the employee may forfeit or lose the ESS interest, other than by intentionally taking no action to realise the benefit.

The meaning of 'real' is something more than a mere possibility. An ESS interest will not be at real risk of forfeiture if a reasonable person would disregard the risk as highly unlikely to occur or as nothing more than a rare eventuality or possibility.

Real risks of forfeiture in a scheme may include conditions where retention of the ESS interests is subject to:

· performance hurdles, or

· minimum terms of employment.

There is no real risk of forfeiture where a scheme simply includes a condition which:

· restricts an employee from disposing of an ESS interest for a specified time

· allows an employee to request the ESS interest be forfeited, or

· provides for an employee to forfeit an ESS interest if they are dismissed for fraud or gross misconduct.

ESS statement

Your employer will give you an ESS statement which will show an estimate of discount you have received on your ESS interests either directly or through an employee share trust. Your ESS statement will show:

· the discount for ESS interests acquired under each type of tax-upfront scheme

· the discount for ESS interests acquired under a tax-deferred scheme for which a taxing point arose during the financial year

· the discount for shares and rights acquired before 1 July 2009, for which a cessation time occurred during the financial year

· the total TFN amounts withheld from discounts during the financial year.

This ESS statement will help your complete your tax return.

How this applies to your circumstance

In your case, the shares you acquired were not under a tax-deferred scheme. The restrictions placed on the disposal of your shares by the company does not create a deferred taxing point as there is no real risk of forfeiture of your shares.

Therefore, the discount amount is included in your income tax return, which is the amount shown on the statement provided by the company.