Edited version of your written advice

Authorisation Number: 1012728499452

Ruling

Subject: Employee share scheme

Question 1

Will the cost base of the shares be the market value of the relevant shares on the date they were granted?

Answer

Yes

This ruling applies for the following period(s)

Income year ended 30 June 2014

The scheme commences on

1 July 2013

Relevant facts and circumstances

You have been an employee of the company for the past x years and have participated in the the companies employee share scheme during this period.

You have accumulated a number of the company shares before selling all of them during the income year ended x.

The shares were granted in the following tranches:

Date of grant # of shares

xx/xx/xxxx xx

xx/xx/xxxx xx

xx/xx/xxxx xx

xx/xx/xxxx xx

xx/xx/xxxx xx

In each of the above years the total value of shares granted was under $1000.

The relevant employee share scheme satisfied the exemption conditions under section 139CE of the Income Tax Assessment Act 1936.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 139B

Income Tax Assessment Act 1936 section 139BA

Income Tax Assessment Act 1936 section 139CE

Income Tax Assessment Act 1936 section 139E

Income Tax Assessment Act 1936 subsection 139E(2B)

Income Tax Assessment Act 1997 section 83A-30

Income Tax Assessment Act 1997 section 130-80

Income Tax (Transitional Provisions) 1997 Act subsection 83A-5(2)

Reasons for decision

Prior to the 1 July 2009, the taxation of employee share scheme interests (ESS interests) was set out in Division 13A of the Income Tax Assessment Act 1936 (ITAA 1936). This section was repealed and replaced by Division 83A of the Income Tax Assessment Act 1997 (ITAA 1997). The Income Tax (Transitional Provisions) 1997 Act provides that where both the grant and taxing point of the ESS interests occur prior to 1 July 2009, then only Division 13A of the ITAA 1936 will be relevant.

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

Subsection 139E(2B) of the ITAA 1936 also provides that you are deemed to have made an election in the relevant income year if the total discount received in respect of the shares was less than $1,000 and the exemption condition in section 139CE are satisfied.

The exemption conditions are listed in section 139CE of the ITAA 1936 as follows:

• The first condition (subsection 139CE(2)) was that the scheme must not contain any conditions that could result in an employee forfeiting ownership of any shares or rights to shares to which the employee had become entitled under the scheme

• The second condition (subsection 139CE(3)) was that the scheme must be operated so that no employee holding a share or a right under it was permitted to dispose of the share or the right acquired, or to dispose of any share acquired as a result of the exercise of the right, before the earlier of:

• the end of three years after the time of acquisition of the share or the right, and

• the time when the employee ceased, or first ceased, to be employed by the employer.

• The third condition (subsection 139CE(4)) was that the employee share scheme and any scheme for the provision of financial assistance in relation to that employee share scheme had to be operated on a 'non-discriminatory basis' as defined in section 139GF.

Section 139BA of the ITAA 1936 provides that where a taxpayer has made an election under section 139E in the year the shares were granted and the exemption conditions are met in section 139CE, then the total amount of the discount is only included to the extent that it is greater than $1,000.

Both the former section 130-80 of the Income Tax Assessment Act 1997 (ITAA 1997) as in force before 1 July 2009 and the current section 83A-35 make it clear that the cost base of a shares acquired under an employee share scheme is the market value of the share on the date they were taken to be acquired.

In your situation as you have received shares of a total value of under $1000 in each income year and the relevant employee share scheme satisfied the exemption conditions under section 139CE of the ITAA 1936. You will be deemed to have made a section 139E election in the income year the shares were granted, consequently the shares are taxed on the date of the grant however no amount need to have actually been included in your assessable income due to the operation section 139BA.

The CGT consequence of the above is that you are deemed to have acquired ownership of the shares on the date of grant and the cost base will be the market value of the shares on that date of grant.