ATO ID 2011/62: Income Tax: employee share scheme - director solely remunerated by issue of options
Date of decision: 25 July 2011
Year of income: Year ended 30 June 2007
Business line: Private Groups and High Wealth Individuals

Issue
Is a director of a listed company who was remunerated only by way of the issue of options entitled to the deferral concession under former Division 13A of Part III (Division 13A) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Decision
No. Where a director's only remuneration was in the form of options issued by the company, the director is not entitled to the deferral concession under former Division 13A of the ITAA 1936.

Facts
An Australian listed public company issued options to acquire shares in the company to a director of the company as a reward and incentive for their services. The options were issued prior to 1 July 2009 and were rights provided under an employee share scheme within the meaning of former Division 13A of the ITAA 1936. The director did not pay anything for the options. The options entitled the director, on payment of an exercise price, to acquire a corresponding number of shares in the company. Neither the director nor any associated entity received, or was entitled to receive, any other remuneration for the director's services. The director was at all relevant times an Australian resident within the meaning of subsection 6(1) of the ITAA 1936. Neither former section 26AAC of the ITAA 1936, nor Division 83A of the Income Tax Assessment Act 1997 (ITAA 1997) applies in relation to the receipt of the options.

Reasons for decision
Summary: Former Division 13A of the ITAA 1936 provides for the taxation treatment of shares and rights acquired prior to 1 July 2009 under employee share schemes. Taxpayers were eligible to have the assessment in relation to the discount from rights deferred until a later year of income provided the rights were qualifying rights within the meaning of the former section 139CD of the ITAA 1936. One of the conditions in former section 139CD of the ITAA 1936 for rights to be qualifying is that the company is the employer of the taxpayer or a holding company of the employer of the taxpayer. 'Employer' is relevantly defined by former subsection 139GA(3) of the ITAA 1936 to be a person who pays, or is liable to pay, work and income support related withholding payments and benefits. 'Work and income support related withholding payments and benefits' are in turn relevantly defined in subsection 6(1) of the ITAA 1936 to include: As the director's only remuneration from the company was in the form of options provided under an employee share scheme, no payment was made to the Director from which an amount must be withheld under a provision of Subdivision 12-B in Schedule 1 to the TAA. The options granted to the director are rights acquired under an employee share scheme within the meaning of former Division 13A of the ITAA 1936. While they are non-cash benefits, former paragraph 14-5(3)(d) of Division 14 in Schedule 1 to the TAA (as applicable at the time the director received the options) specifically excludes such employee share scheme benefits from the operation of that Division. Thus the company was not at the time the options were provided, the employer of the taxpayer or a holding company of the employer of the taxpayer. Accordingly, the rights acquired by the director are not qualifying rights. As the rights are not qualifying rights, the director is not eligible for the deferral concession under former Division 13A of the ITAA 1936. The discount is assessable in the year of income in which the rights were acquired.

Legislative references: Income Tax Assessment Act 1936 subsection 6(1) section 26AAC Division 13A of Part III section 139CD subsection 139GA(3)
Subject references: Employee share schemes & options Directors remuneration