Private ruling: employee share scheme
Published: June 2012
Ruling period: Year ended 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1:  | A1: Yes.


Relevant legislative provisions: Income Tax Assessment Act 1936 Section 139C | Income Tax Assessment Act 1997 Section 139G | Income Tax Assessment Act 1997 Section 139CC | Income Tax Assessment Act 1997 Section 139CB

Reasons for decision: Summary: While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision. | Detailed Reasoning - Employee share scheme (ESS): You acquire shares and rights under an employee share scheme when they are acquired in respect of your employment and the consideration paid for their acquisition is less than the market value of the shares at the time you acquired them. Section 139G of the ITAA 1936 provided that an employee acquires a right in various circumstances including the time when another person grants a right (being a right to acquire a share) to the employee. When the shareholders approved the resolution to allow the company at some time in the future, to grant rights to acquire shares in the company to the employee, no contractual obligations were created between the company and employee at that time. Therefore, the resolution did not grant a right to the employee within the meaning of section 139G of the ITAA 1936. However, when the company subsequently entered into a contract with the employee to grant rights to acquire shares in the company, a right was granted to the employee within the meaning of section 139G of the ITAA 1936. Therefore, a right to acquire a share was acquired by the employee under an employee share scheme when the company entered into a contract with the employee to grant a right to acquire the share in the company. | Detailed Reasoning - Section 139E: An election under section 139E of the ITAA 1936 can be made by an employee in respect of the qualifying shares and rights. The effect of making an election is that the discount given in respect of the qualifying shares and rights is included in the employee's assessable income in the year of acquisition. If an election is not made, the discount is included in the employee's assessable income when cessation time occurs. As you did not make an election, you are required to include the discount in your assessable income in the year in which cessation time occurs. | Detailed Reasoning - Cessation time: The cessation time for rights is the earliest of the following times: · when the rights are disposed of (other than by exercise) · when the employee's employment ceased with the employer · if the rights are exercised, when the last of any disposal restrictions or forfeiture condition in respect of the acquired shares expire · when the rights are exercised, where there is no restrictions or conditions on the acquired shares, or · 10 years from the date of acquisition of the rights. If you dispose of your rights at arm's length within 30 days of cessation time, the discount is calculated as the amount of consideration you received for their disposal less any consideration you provide to acquire the rights. | Detailed Reasoning - How this applies to your circumstances: In your case, even though the shareholders of the company approved of the granting of rights in the late 1990's, you were not granted the right to acquire shares until some four years later. Therefore, your acquisition date is the date the rights were granted to you. Your cessation time is the date when you exercise your rights, as there were no restrictions or conditions on the shares that you acquired | Detailed Reasoning - Calculating the discount: Where you pay nothing to acquire the rights, the calculation of the discount at cessation time is generally the difference between the market value of the shares you acquire by exercising the rights at the cessation time and any amount you paid to acquire those shares. Therefore, you are required to include the amount of discount you received on the acquisition of these rights in your 201X-1X income tax return. Note : All amounts expressed in foreign currency must be translated into the Australian currency equivalent at the relevant time or event.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Subject: employee share scheme: Question: Is the discount on options acquired under an employee share scheme included in your assessable income at the time you exercise your rights to acquire the shares where you did not make an election under section 139E of the Income Tax Assessment Act 1936 (ITAA 1936)? | You are employed by an international company (the company). | In the 1990's the shareholders of the company approved a scheme to grant qualifying options (herewith known as rights) - Stock Option Plan, to acquire company shares to certain employees and gave the power to the board of directors to put the scheme into effect. | Approximately four years later the board of directors granted the participants the possibility of purchasing shares at the market value of a specified amount per share which was the market price at that date. | Months later you were advised you were a participant in the employee share plan scheme and you were granted a specified number of rights. The rights were subject to achieving set objectives. | You paid nothing to acquire these rights. | You did not make a section 139E election. | Four years later because of the share capital increase completed in that year partially due to an acquisition of a company and in accordance with the rules of the stock option plans, there has been an adjustment to the exercise price and quantity of stock rights you may exercise. | Over two years ago you exercised your right to acquire a specified number shares. | Early last year you disposed of your shares. | You have lodged your 200X-1X and 201X-1X income tax returns. | You have provided a copy of documentation to support your application and these documents are to be read with and forms part of your application for the purpose of this ruling: