ATO ID 2003/128: Capital Gains Tax: Date of acquisition of shares - exercise of options acquired under employee share schemes
Date of decision: 14 January 2003
Year of income: 30 June 2002
Business line: Public Groups and International

Issue
When is a share, acquired as the result of the exercise of an option issued under an employee share scheme taken to be acquired under Division 109 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
Under section 109-10 of the ITAA 1997, shares acquired upon the exercise of an option granted under an employee share scheme, are acquired when the contract resulting from the exercise of the option is entered into and not when the contract for the acquisition of the option was entered into.

Facts
The taxpayer acquired options to purchase shares under an employee share scheme in August 1996. The terms and conditions of the options provided that: Some years later, the taxpayer exercised the option to acquire some shares. The taxpayer sold the shares less than 12 months after they exercised the option, and made a capital gain. The taxpayer sought to apply the CGT discount to the capital gain from the sale of the shares. The taxpayer argued that the shares were acquired when the taxpayer entered into the contract for the acquisition of the options.

Reasons for decision
Summary: Division 13A of Part III of the Income Tax Assessment Act 1936 (ITAA 1936) deals with the assessability of discounts relating to shares and rights under employee share schemes. It does not operate to determine the date at which shares are acquired when an option is exercised. The time of acquisition of the shares is determined in accordance with Division 109 of the ITAA 1997. When a company issues or allots shares, the time of acquisition of the shares is when the contract is entered into or, where there is no contract, when the shares are issued or allotted (item 2 of the table in section 109-10 of the ITAA 1997). In this case the shares were acquired pursuant to a contract. The shares were acquired at the time the contract that directly effected their acquisition was entered into and not at the time when the contract for the acquisition of the options was made. Prior to that time, the taxpayer had not contracted to acquire the shares but was simply in possession of an irrevocable offer to allot a share at a pre-determined price if the taxpayer chose to request the allotment within the period of the offer. The shares were therefore acquired when the taxpayer gave notice of the exercise of the option to request allotment of the shares and not at the time the options were acquired. As a result, the shares sold were not acquired at least 12 months prior to the date of their sale and the taxpayer is not entitled to the CGT discount.

Legislative references: Income Tax Assessment Act 1997 Division 109 section 109-10
Related public rulings and determinations: Capital Gains Tax Determination TD 16
Subject references: Capital gains tax Employee share schemes & options Acquisition of CGT assets