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Ruling

Subject: Employee shares - transfer of shares as a result of a Court Order

Question 1

Is the release of the shares from non-vesting to vesting as a result of the Court Order transfer of employee share scheme shares on marriage breakdown considered to be a 'cessation time' for income tax purposes?

Answer

Yes.

Question 2

Does section 83A-310 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to the shares that were transferred to your ex spouse as a result of the Court Order?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

You acquired a number of qualifying shares under an employee share scheme. These shares were acquired some time prior to 1 July 2009 and were subject to restrictions.

Some years later the shares were transferred to your ex spouse under a Court Order as a result of the breakdown of your marriage.

During the relevant income year you received an employee share scheme statement from the company in which the shares were held which advised that you are required to include an amount at label G in your relevant income tax return. This amount comprises the discount from a number of separate 'cessation times' and a portion of the total is in relation to the transfer of the shares to your ex spouse.

Relevant legislative provisions

Income Tax Assessment Act 1936 - Division 13A of Part III,

Income Tax Assessment Act 1936 - Section 139CA,

Income Tax Assessment Act 1997 - Division 83A,

Income Tax Assessment Act 1997- Section 83A-310 and

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

Reasons for decision

Summary

Cessation time occurred in respect of the shares at the time any restrictions or forfeiture conditions ceased to exist and the shares were then disposed of rather than forfeited.

Is the release of the shares from non-vesting to vesting as a result of the Court Order transfer of employee share scheme shares on marriage breakdown considered to be a 'cessation time' for income tax purposes?

On 1 July 2009 new laws were introduced in relation to interests acquired under an employee share scheme. The legislative provisions pertaining to the taxation of shares acquired under an employee share scheme changed from Division 13A of the Income Tax Assessment Act 1936 (ITAA 1936) to Division 83A of the ITAA 1997.

The new law provided transitional arrangements that apply to some interests acquired prior to 1 July 2009. These transitional arrangements may result in a combination of both the old and new laws applying.

Where a taxpayer acquired qualifying shares under an employee share scheme prior to 1 July 2009 and:

· they did not elect to be taxed upfront under the previous law, and

· a cessation time did not happen to the shares before 1 July 2009

· the shares will have a deferred taxing point that is determined by reference to the cessation time worked out using the old law, however the new law applies to the calculation of the discount amount.

Paragraph 139CA(2)(b) of the ITAA 1936 provides that the cessation time for a share with restrictions is the later of:

· the time when any restriction preventing the taxpayer from disposing of the share ceases to have effect; and

· the time when any condition that could result in the taxpayer forfeiting ownership of the shares ceases to have effect.

In your situation, the cessation time for your shares occurred when any restrictions or forfeiture conditions ceased, which was just prior to the transfer in the relevant income year.

Does section 83A-310 of the ITAA 1997 apply to the shares that were transferred to your ex spouse as a result of the Court Order?

The term 'forfeiture' is not defined by either the ITAA 1936 or ITAA 1997. Therefore it is necessary to rely on the ordinary dictionary meaning.

The Oxford Dictionary provides the definition of forfeiture as "the loss or giving up of something as a penalty for wrongdoing".

In the context of shares acquired under an employee share scheme, shares would be forfeited if they were taken off you by your employer as a result of some misdeed in relation to your employment. It would be expected that the ownership of the forfeited shares would revert back to the company in which you are employed or that the shares would be cancelled altogether.

In your situation, we consider that the shares that you owned were not forfeited but were merely transferred to another person (your ex spouse) as a result of a Court Order after the breakdown of your marriage. They were not returned to the relevant company and they were not cancelled. Accordingly, the shares were disposed of rather than forfeited.