ATO ID 2005/237: PAYG Instalment Income and Employee Share Scheme
Date of decision: 4 August 2005
Year of income: Year ended 30 June 2005 Year ended 30 June 2006 Year ended 30 June 2007 Year ended 30 June 2008
Business line: Private Groups and High Wealth Individuals

Issue
Is the discount that a taxpayer receives, as an employee, on a qualifying right that the taxpayer acquires under an employee share acquisition scheme included in the taxpayer's PAYG instalment income if the taxpayer does not make an election under subsection 139E(1) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Decision
No, the discount that the taxpayer, an employee receives, on a qualifying right that the taxpayer acquires under an employee acquisition share scheme is not included in the taxpayer's PAYG instalment income if the taxpayer does not make an election under subsection 139E(1) of the ITAA 1936.

Facts
The taxpayer is an employee who is granted rights to acquire shares at a discount under an employee share acquisition scheme. The right has an expiration date of a number of years from the date of granting the right. The rights are qualifying rights for the purposes of Division 13A of the ITAA 1936. The taxpayer has not made an election under subsection 139E(1) of the ITAA 1936 to include the discount on the qualifying rights in the taxpayer's assessable income in the year in which the rights were acquired.

Reasons for decision
Summary: Section 45-120 of Schedule 1 to the Taxation Administration Act 1953 (TAA) provides that instalment income for a period includes ordinary income derived during that period, but only to the extent that it is assessable income of the income year that is or includes that period. Under subsection 139B(1) of the ITAA 1936, if a taxpayer has acquired a right under an employee share scheme, the assessable income of the taxpayer includes the discount in relation to the share or right. In relation to a qualifying right, the discount on the right is not included in the taxpayer's assessable income in the year of income in which the right is acquired if the taxpayer has not made an election under subsection 139E(1) of the ITAA 1936 for the year of income in which the share or right is acquired. Rather, the discount is included in the taxpayer's assessable income of the year in which the cessation time occurs under subsection 139B(3) of the ITAA 1936. In this case, the discount is not included in the taxpayer's instalment income in the year that the rights were acquired because the discount is not assessable in that year. In the later income year (cessation time), the discount is not included in the taxpayer's instalment income because the discount is not ordinary income derived in the later year. Accordingly, the discount that the taxpayer, an employee receives, on a qualifying right granted under an employee acquisition share scheme is not included in the taxpayer's PAYG instalment income if the taxpayer does not make an election under subsection 139E(1) of the ITAA 1936.

Legislative references: Income Tax Assessment Act 1936 section 139B section 139E
Subject references: Employee share schemes & options PAYG instalment income Qualifying rights