ATO ID 2002/454: Employee Share Schemes & Options - Valuation of Shares
Date of decision: 15 February 2002
Year of income: Year ended 30 June 2001 Year ending 30 June 2002
Business line: Private Groups and High Wealth Individuals

Issue
Should valuations prepared by an overseas tax authority (OTA) for unlisted ordinary shares, in an overseas company, be accepted by the Commissioner of Taxation as a reasonable method of calculating the arms length value of those shares in terms of paragraph 139FB(1)(b) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Decision
Yes. The valuations are acceptable, as a reasonable method has been used by the OTA to calculate the arm's length value of the shares in terms of paragraph 139FB(1)(b) of the ITAA 1936.

Facts
The company (X) is a wholly owned subsidiary of an overseas company (Y). X is based in Australia whilst Y is based overseas. As part of it's remuneration strategy Y issued share options to its employees. The share plan is structured in such a way that it is tax effective in the overseas country and provides qualifying shares under section 139CD of the ITAA 1936. Neither the options nor the ordinary shares of Y are listed on any stock exchange. In order for the employees to take advantage of the beneficial tax treatment in the overseas country they must have an approved valuation of the shares over which they have options. This valuation was obtained from the OTA. The OTA used a deductive method to value the shares. They compared the rights attached to ordinary shares such as the right to participate in dividends and the right to vote with the rights attached to preference shares issued to the company's venture capital investors. These rights were then benchmarked by the OTA against other similar companies to establish an appropriate discount to calculate the ordinary share price of Y. The methodology used by the OTA is similar to the methodology, which would be used by a registered company auditor in Australia, to establish the market value of a share. The valuations are valid only for 28 days and incorporate the latest issue price of the preference shares and other relevant factors.

Reasons for decision
Summary: The discretionary power in section 139FB of the ITAA 1936 allows some flexibility with respect to the calculation of an arm's length value for unlisted shares. What is important is the outcome, in that the particular method adopted does produce an arm's length market value. The method used by the OTA achieves a fair commercial valuation of the company's ordinary shares. The valuation of the ordinary shares of Y, current at the time of issue of employee options, issued by the OTA, is accepted as a reasonable method of valuing the ordinary shares of the company for the purposes of section 139FB of the ITAA 1936.

Legislative references: Income Tax Assessment Act 1936 section 139FB section 139CD paragraph 139FB(1)(b)
Subject references: Employee share schemes & options