ATO ID 2012/45: Employee Share Scheme: value of right where exercise price of right can not be determined
Date of decision: 22 May 2012
Year of income: Year ended 30 June 2005
Business line: Private Groups and High Wealth Individuals

Issue
Where former section 139FE of the Income Tax Assessment Act 1936 (ITAA 1936) refers to an exercise price which 'can not be determined', is this a reference to an exercise price which can not be determined on the particular day on which a right is being valued?

Decision
Yes. The reference in former section 139FE of the ITAA 1936 to an exercise price which 'can not be determined' is a reference to an exercise price which can not be determined on the particular day on which a right is being valued.

Facts
The taxpayer acquired options from their employer in relation to their employment under a share option plan. The options were acquired at a discount to their market value. The options were rights acquired under an employee share scheme pursuant to former section 139C of the ITAA 1936. The options did not meet the 'qualifying rights' conditions set down in former section 139CD of the ITAA 1936. At the time the rules of the share option plan were adopted, the board of the company was preparing to make an initial public share offer. Under the rules of the plan, the exercise price of the options was to be determined by reference to the initial public share offer. If the offer was successfully completed, the exercise price was to be equal to the price at which the shares were offered to the public pursuant to the offer document. If the offer was not successfully completed by a particular future date, the exercise price was then to be a price determined by the directors of the company. Shares were offered to the public at a price of $4.00 per share. The taxpayer acquired the options before the required date of completion of the public offer. The public offer was then successfully completed by the required date.

Reasons for decision
Summary: As the options did not meet the qualifying rights conditions set down in former section 139CD of the ITAA 1936, the taxpayer was required to include any assessable discount in relation to the acquisition of the options in their taxation return for the income year in which they acquired the options. According to former subsection 139CC(2) of the ITAA 1936, the discount is calculated as the 'market value of the share or right at the time when it was acquired by the taxpayer less any consideration paid or given by the taxpayer as consideration for the acquisition of the share or right'. In determining the market value of the right, former subsection 139FE(1) of the ITAA 1936 states that 'if the lowest amount that must be paid to exercise a right to acquire a share is nil or can not be determined, the market value of the right on a particular day is the same as the market value of the share on that day'. When former subsection 139FE(1) of the ITAA 1936 refers to an amount which 'can not be determined', it is a reference to an exercise price which can not be determined on the particular day on which the right is being valued. The right is being valued on the date of acquisition. The taxpayer acquired the options before the date of completion of the initial public offer. The exercise price was only determined to be $4.00 at the date of the completion of the initial public offer. Thus, pursuant to the share option plan, the exercise price on the particular day of acquisition had not yet been determined and therefore could not be determined on that particular day. Accordingly, pursuant to former section 139FE of the ITAA 1936, the market value of the options on the day they were acquired was equal to the market value of the shares on that particular day.

Legislative references: Income Tax Assessment Act 1936 section 139C subsection 139CC(2) section 139CD section 139FE subsection 139FE(1)
Subject references: Employee share schemes & options Market value cost base