ATO ID 2003/189: Employee Share Scheme: employee loses rights for no valuable consideration
Date of decision: 19 November 2002
Year of income: Year ended 30 June 1999
Business line: Private Groups and High Wealth Individuals

Issue
Is a right to acquire a share granted to a taxpayer, an employee, under an employee share scheme, never acquired by the taxpayer for the purposes of Division 13A of the Income Tax Assessment Act 1936 (ITAA 1936) because of subsection 139DD(1) of the ITAA 1936, if no valuable consideration was received by the taxpayer for the loss of the right?

Decision
Yes. A right to acquire a share granted to a taxpayer, an employee, under an employee share scheme, is never acquired by the taxpayer for the purposes of Division 13A of the ITAA 1936 because of subsection 139DD(1) of the ITAA 1936, if no valuable consideration was received by the taxpayer for the loss of the right.

Facts
The taxpayer was granted rights to acquire shares in their employer's company under an employee share scheme. The taxpayer paid no consideration to acquire the rights. Some rights were cancelled while the taxpayer was employed by the company, others were forfeited on the taxpayer ceasing to be an employee and the remainder lapsed after ceasing employment. The taxpayer received no valuable consideration for the loss of the rights. The taxpayer did not exercise the rights.

Reasons for decision
Summary: For the purposes of Division 13A of the ITAA 1936, a right to acquire a share in a company is never acquired by an employee under subsection 139DD(1) of the ITAA 1936 if the following two conditions are satisfied: The taxpayer has not received valuable consideration for the loss of those rights. The rights cease to exist as they have been cancelled, forfeited or lapsed. The taxpayer has lost the rights without having exercised them. Accordingly, as the taxpayer satisfies the two conditions, the rights are never acquired by the taxpayer for the purposes of Division 13A of the ITAA 1936. If the discount given on the rights has been included in the taxpayer's assessable income, either in the year of acquisition, due to an election, or the year of cessation time, subsection 139DD(4) of the ITAA 1936 enables the assessment to be amended to exclude the discount. Note - If the taxpayer receives valuable consideration for rights that have not been exercised, the taxpayer does not lose the rights for the purposes of Division 13A of the ITAA 1936.

Legislative references: Income Tax Assessment Act 1936 Division 13A subsection 139DD(1) subsection 139DD(4)
Subject references: Forfeiture of rights & entitlements Share discounts on employee share schemes