ATO Interpretative Decision
ATO ID 2009/76 (Withdrawn)
Income Tax
Share capital taintingFOI status: may be released
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This ATO ID is withdrawn as the ATO is currently reconsidering its view on this issue.This document has changed over time. View its history.
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Will the accounting entries used by employer Company XYZ (XYZ), for the provision of shares in their Employee Share Scheme (ESS), result in the application of the share capital tainting provisions in Division 197 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
No. There is no transfer into the share capital account as required for the application of subsection 197-5(1) of the ITAA 1997. Therefore, there is no share capital tainting.
Facts
XYZ are required to account for shares granted under an ESS by virtue of Accounting Standard AASB 2 Share-based payment (AASB2). Once the shares are granted to the employees the following amounts are accrued over the vesting period:
| Share based expense component | ||
| DR | Share based expense (P&L) | $100 |
| CR | Equity based payment reserve | $100 |
Once the shares have vested in the employee the company makes the following accounting entries:
| Vesting Date - Reduction in reserve | ||
| DR | Equity based payment reserve | $100 |
| CR | Share based expense (P&L) | $100 |
| Vesting Date - Recognition of vested shares | ||
| DR | Share based expense (P&L) | $100 |
| CR | Paid up capital | $100 |
Reasons for Decision
There are two parts to the accounting entries for the ESS. These are:
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- The company accounts for the potential impact of the share based payments prior to the shares vesting in the employees.
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- The company accounts for the actual impact of the share based payments when the shares are vested in the employees.
These two parts will be considered separately.
Prior to vesting date
XYZ accounts for the accrual of the share based expense in respect of the ESS in accordance with AASB2. The accounts are adjusted at various times, prior to the vesting of shares to an employee, to reflect the estimation of the share based expense that will be incurred. This is accomplished by:
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- Debit 'Share based expense'
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- Credit 'Equity based payment reserve'.
The 'Equity based payment reserve' account is not a share capital account. A share capital account is defined in section 975-300 of the ITAA 1997 as 'an account that the company keeps of its share capital' and the first amount credited to the account was an amount of share capital. Share capital is not defined in the ITAA 1997. However, the Explanatory Memorandum (EM) accompanying Taxation Laws Amendment (2006 Measures No. 3) Bill 2006 provides that 'share capital includes amounts received by a company in consideration for the issue of shares.'
The 'Equity based payment reserve' account does not meet the criteria of a share capital account because:
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- It is not an account which is used to keep account of the company's share capital.
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- The first amount credited to the account was not share capital. The first amount credited to the account was an amount which recognised the potential value of the shares provided to the employees and was not an amount received for the consideration of an issue of shares.
Since the 'Equity based payment reserve' account is not a share capital account, subsection 197-5(1) of the ITAA 1997 does not apply to transfers into the account.
Post vesting date
Upon vesting of the shares in the employees, the accounting entries that recognised the actual share expense accrued at the vesting date are reversed and new entries record the actual issue of shares by increasing the 'Share based expense' account and increasing the 'Share capital' account.
The accounting transactions which occur on the actual issue of shares to XYZ's employees are not a transfer for the purposes of subsection 197-5(1) of the ITAA 1997. This is because, as stated in the EM:
4.12 An amount is transferred from one account to another where that amount is moved from one account to another. This, in turn, requires the balance of the first account to be reduced, while the balance of the second account is increased by the same amount.
Since the entries are not a transfer, subsection 197-5(1) of the ITAA 1997 does not apply. Therefore there is no share capital tainting.
Date of decision: 15/07/2009Year of income: Year ended 30 June 2009
Legislative References:
Income Tax Assessment Act 1997
subsection 197-5(1)
section 197-5
section 975-300
ATO ID 2002/355
Other References:
Taxation Laws Amendment (2006 Measures No.3) Bill 2006 (80 of 2006)
Keywords
Employee share schemes & options
Tainted share capital account
ISSN: 1445-2782
| Date: | Version: | |
| 15 July 2009 | Original statement | |
| You are here | 15 July 2011 | Archived |