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Edited version of your written advice
Authorisation Number: 1012871585343
Date of advice: 3 September 2015
Ruling
Subject: CGT - Shares - options - reduction in exercise price
Question:
Does the change in strike price on stock options issued as part of the employee share scheme change the cost base of those options when a CGT event happens to them?
Answer:
No.
This ruling applies for the following period<s>:
2014-15 income year
2015-16 income year
The scheme commences on:
1 July 2012
Relevant facts and circumstances
This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.
After 1 July 2009, you were granted stock options as part of an employee share scheme in a private foreign company. The options had a strike price based on their market value at the grant date with a vesting schedule of ¼ vesting after 12 months and 1/12 vesting every three months after that.
You believe that most or all other employees have received similar offers as part of their remuneration package. You believe the total number of employees worldwide to be less than 300. There may be a similar number of shareholders in total.
In the relevant income tax return, you declared the vested portions of these options as employee share scheme income using the share price table supplied by the company. As it happened, the share value at each vesting point was slightly higher than the market value when the options were originally issued to you.
Recently, a dilution event occurred. A major lender withdrew their support and the company issued a significant number of new shares to the market to maintain liquidity.
As a result of the dilution event, the share price fell to about 1/7 of its value at the deferred taxing point and as part of the compensation to employees the company amended the strike price to match the reduced share price.
You have not exercised any of the options. You did not receive any payments or other compensation (other than the strike price reduction) as a result of the dilution event.
You own a small number of other shares that have been allocated to you under other employee share schemes. You do not have any association with the company or the other shareholders beyond your role as an employee.
The text of the 'Amendment of Option Agreement' signed by you is to be read with and forms part of the description of the scheme for the purpose of this ruling.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 104-155
Income Tax Assessment Act 1997 Division 110,
Income Tax Assessment Act 1997 Division 112 and
Income Tax Assessment Act 1997 Division 725.
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.
Summary
The change in strike price on stock options issued as part of the employee share scheme does not change the cost base of those options when a CGT event happens to them.
Detailed reasoning
The first element of an option is its market value calculated as at its taxing point (either the grant date or the deferred taxing point) if the option is granted to you under an employee share scheme. This is to ensure that the option is not taxed twice.
Generally, the first element of the cost base doesn't change while the option is held as a CGT asset; however, there are some exceptions.
Ownership of an option provides you with a number of rights that are stipulated in the documents that support or explain the option. The right to pay the nominated strike price irrespective of the prevailing market value of the shares is one such right attached to an option.
In your case, this right has been varied, but you have not received any payment in association with the variation
It is accepted that the revision of the strike price was not being considered or contemplated at the employee share scheme deferred taxing point. The market value at the deferred taxing point may have been calculated differently had it been.
However, the subsequent alteration to the strike price due to the dilution event will not change the cost base of the options because:
• You are not a controller or an associate of a controller of the company for general value shifting purposes, and
• The value of the adjustment is not material for general value shifting purposes
CGT event H2 will not occur as you did not receive a payment due to owning the options.