ATO ID 2003/24: Employee share scheme: Permanent Employees requirement for Qualifying Shares
Date of decision: 24 September 2002
Year of income: Year ending 30 June 2003 Year ending 30 June 2004 Year ending 30 June 2005
Business line: Private Groups and High Wealth Individuals

Issue
Will shares acquired by a taxpayer under an employee share scheme be qualifying shares under section 139CD of the Income Tax Assessment Act 1936 (ITAA 1936), if an employer has no permanent employees for the purposes of subsection 139CD(5) of the ITAA 1936?

Decision
Yes. Shares acquired by a taxpayer under an employee share scheme will be qualifying shares under section 139CD of the ITAA 1936, if an employer has no permanent employees for the purposes of subsection 139CD(5) of the ITAA 1936.

Facts
The taxpayer is an employee of a company. The taxpayer acquired discounted shares under the company operated employee share scheme. The scheme has restrictions on the disposal of shares. The only employees of the company are full-time or permanent part-time, none of whom have been employed by the company for more than 36 months. The directors of the company are also entitled to shares under the employee share scheme. The shares satisfy the first, second, third, fifth and sixth conditions of section 139CD of the ITAA 1936.

Reasons for decision
Summary: The taxing point for the discount given on shares acquired under an employee share scheme depends on whether the shares are qualifying shares, and if the taxpayer has made an election under section 139E of the ITAA 1936. Section 139CD of the ITAA 1936 sets out the six conditions that need to be satisfied for a share to be a qualifying share for the purposes of Division 13A of the ITAA 1936. The taxpayer's shares will be qualifying shares if the fourth condition relating to permanent employees in subsection 139CD(5) of the ITAA 1936 is satisfied, as all other conditions are met. This fourth condition requires that at least 75 per cent of permanent employees of the company were, or at some earlier time had been, entitled to acquire shares under the employee share scheme. A permanent employee of a company is defined as a full-time employee or permanent part-time employee with at least 36 months of service (subsection 139GB(1) of the ITAA 1936). A director is excluded from being a 'permanent employee' of the company (subsection 139GB(2) of the ITAA 1936). The employees and directors of the company are not 'permanent employees' for the purposes of the fourth condition in subsection 139CD(5) of the ITAA 1936. As there are no 'permanent employees' of the company, the fourth condition is satisfied. Accordingly, the taxpayer's shares are qualifying shares for the purposes of section 139CD of the ITAA 1936. As the shares are qualifying shares under section 139CD of the ITAA 1936, the discount is included in the taxpayer's assessable income in the income year of acquisition if an election is made (subsection 139B(2) of the ITAA1936) or in the income year that the cessation time occurs (subsection 139B(3) of the ITAA 1936). Note 1: For shares acquired on or after 26 June 2005, section 139CD of the ITAA 1936 imposes an additional condition that needs to be satisfied for a share to be a qualifying share for the purposes of Division 13A of the ITAA 1936. That is, in the case of a share that a taxpayer acquired while engaged in foreign service, section 139CDA of the ITAA 1936 must apply to the share. Note 2: 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 subsection 139B(2) subsection 139B(3) section 139CD subsection 139CD(5) section 139E subsection 139GB(1) subsection 139GB(2)
Subject references: Employee share ownership Acquisition of shares Shares Employee share schemes & options Share discounts on employee share schemes Permanent employees