ATO ID 2006/186: Employee Share Scheme: replacement shares received on takeover
Date of decision: 10 July 2006
Year of income: 30 June 2005
Business line: Private Groups and High Wealth Individuals

Issue
Where a share acquired by an employee under an employee share scheme (ESS) has had a cessation time within the meaning of Division 13A of Part III of the Income Tax Assessment Act 1936 (Division 13A of the ITAA 1936), and that share is subsequently replaced by another share in connection with a 100% takeover, will the replacement share be treated as if it were a continuation of the original share, in accordance with Subdivision DA of Division 13A of the ITAA 1936?

Decision
No. The replacement share acquired by the employee in connection with a 100% takeover, will not be treated as if it were a continuation of the original share, in accordance with Subdivision DA of Division 13A of the ITAA 1936.

Facts
The employee acquired qualifying shares (within the meaning of section 139CD of the ITAA 1936) in their employer under an ESS. The employee did not make an election under section 139E of the ITAA 1936 in respect of the shares. The employee includes the discount in relation to the shares in their assessable income in the year the cessation time happens. In the following year, the employer company is taken over and the employee's original shares are replaced with shares in the new company. The replacement shares are considered to be 'matching shares' as described in section 139DQ of the ITAA 1936. The employee is employed by the new company after the takeover. Shares in the new company are ordinary shares. When the employee receives the replacement shares, they do not hold a legal or beneficial interest in more than 5% of the shares in the new company, nor is the employee in a position to cast, or control the casting of, more than 5% of the maximum number of votes that may be cast at a general meeting of the new company.

Reasons for decision
Summary: Where a taxpayer holds a qualifying share and has not made an election under section 139E of the ITAA 1936 covering the share (a deferred share), the discount in relation to the deferred share is included in the taxpayer's assessable income in the year of income in which the cessation time occurs, pursuant to subsection 139B(3) of the ITAA 1936. However, where a cessation time as described in section 139CA of the ITAA 1936 occurs as a result of a takeover or restructure, Subdivision DA of Division 13A of the ITAA 1936 can apply in appropriate circumstances. This Subdivision, which came into effect from 1 April 2005, was implemented to provide relief from the possible early application of the provisions of sections 139CA or 139CB of the ITAA 1936 (determination of a cessation time) as a result of takeovers and restructures that occur after 1 July 2004. Where these provisions do apply, replacement shares or rights acquired by an employee under a restructure or a takeover are treated as if they are a continuation of the original shares or rights, and as a consequence, the restructure or takeover does not trigger an early cessation time. The object of Subdivision DA as set out in section 139DP of the ITAA 1936 relevantly states that: The object of this Subdivision is to allow this Division to continue to apply, in appropriate circumstances, to 100% takeovers or restructures of companies that have employee share schemes. Where deferred shares have had a cessation time happen that is unrelated to a 100% takeover or restructure of a company, the discount in relation to the deferred shares is included in a taxpayer's assessable income in the year of income in which the cessation time occurs. If those shares are subsequently replaced as a result of a 100% takeover or restructure of the company, it is clear that in accordance with the objects of Subdivision DA as stated in section 139DP of the ITAA 1936, this is not an appropriate circumstance for this Subdivision to apply. Thus, where shares acquired by an employee under an ESS have had a cessation time and the shares are subsequently replaced, the replacement shares will not be treated as if they were a continuation of the original shares, in accordance with Subdivision DA of Division 13A of the ITAA 1936. Note: Division 13A of Part III of the ITAA 1936 was repealed by the Tax Law Amendment (2009 Budget Measures No. 2) Act 2009 (133 of 2009). Division 83A of the Income Tax Assessment Act 1997 applies to shares, rights and stapled securities acquired under an employee share scheme on or after 1 July 2009.

Legislative references: Income Tax Assessment Act 1936 Division 13A of Part III Subdivision DA of Division 13A subsection 139B(3) section 139CA section 139CB section 139CD section 139DP section 139DQ section 139E
Subject references: Employee share schemes and options