Private ruling: Employee share schemes - options - capital gains tax
Published: June 2012
Ruling period: Year ended 30 June 2011.
Date scheme commenced: 1 July 2006.

Ruling: Q1: Will you pay tax on the discount on options you acquired under an employee share scheme (ESS)? | A1: Yes. | Q2: Can you delay paying tax on the discount that you received on options you acquired under an ESS until you dispose of your shares? | A2: No.

Relevant facts and circumstances: In the 2007 income year you acquired rights to acquire options under an ESS which had vesting dates in three tranches. You have requested that this ruling applies only to the tranche of options with the vesting date in the 2011 income year. Your options are qualifying options. You did not make a 139E election. You exercised this tranche of options in the 2011 income year. You have not sold any of the shares.

Relevant legislative provisions: Income Tax (Transitional Provisions) Act 1997 Subsection 83A-5(2), | Income Tax (Transitional Provisions) Act 1997 Subsection 83A-5(4), | Income Tax Assessment Act 1936 Section 139E, | Income Tax Assessment Act 1936 Section 139CB, | Income Tax Assessment Act 1997 Subsection 6-10, | Income Tax Assessment Act 1997 Section 83 A-120 and | Income Tax Assessment Act 1997 Section 83 A-125. Question 1 | ESS discount | The ESS rules contained in division 13A of the ITAA 1936 (the old ESS rules) that applied to options acquired through an ESS before 1 July 2009 were repealed on 14 December 2009. | The old ESS rules were replaced by division 83A in the ITAA 1997 which contains the ESS rules (the new ESS rules) that apply to options acquired on or after 1 July 2009 through an ESS. | Even though you acquired the options through an ESS before 1 July 2009, the new ESS rules will apply to determine when you include the discount in your income tax return. | Options acquired through an ESS before 1 July 2009 to which the new rules apply are known as transitioned interests. | Options acquired under an ESS before 1 July 2009 are transitioned interests if: | · they are qualifying rights to acquire options under the old ESS rules, and | · no election was made to be taxed upfront under the old ESS rules, and | · a cessation time has not happened to the options before 1 July 2009 under the old ESS rules. | In your case: | · you acquired options under an ESS, | · you acquired the options before 1 July 2009, | · the options were qualifying options under the old ESS rules, | · you did not make a 139E election under the old ESS rules to be taxed upfront (that is, at the time you acquired the options) on the discount you received on the options, and | · the cessation time for the options was after 1 July 2009. | Accordingly, the options you acquired before 1 July 2009 under the ESS are transitioned interests and the new ESS rules will apply to determine when the discount is to be included. | Therefore, it is necessary to examine how the new ESS rules apply to your circumstances. | Section 83A-5 of the Income Tax (Transitional Provisions) Act 1997 (ITTPA 1997) provides that subdivision 83A-C of the ITAA 1997 applies to transitioned interests. | Subdivision 83A-C of the ITAA 1997 contains rules for when the discount received on the acquisition of options through an ESS is included in a taxpayer's income tax return and how the discount is determined. Essentially, subdivision 83A-C of the ITAA 1997 provides that the income year in which the ESS deferred taxing point for the ESS interest occurs includes the market value of the share at the ESS deferred taxing point, reduced by the cost base of the option. | 'Deferred taxing point' is a new term provided for by the new ESS rules. | Essentially, the deferred taxing point under the new ESS rules is similar in concept to what was known as the 'cessation time' under the old ESS rules. The cessation time was the point in time that a discount obtained under an ESS was to be included in a taxpayer's income tax return in cases where the taxpayer did not elect under the old ESS rules to be taxed upfront on the discount. | Under the new ESS rules, the deferred taxing point is determined in accordance with the provisions of section 83A-120 of the ITAA. | The application of subdivision 83A-C of the ITAA 1997 to transitioned interests is modified slightly by subsection 83A-5(4) of the ITTPA 1997 which provides that where Subdivision 83A-C of the ITAA 1997 applies to transitioned interests the deferred taxing point for the transitioned interests is taken to be the cessation time under the old ESS rules. | In your case the options are transitioned interests. Therefore: | · you will need to determine the discount applicable to the options. That is, the discount will be the market value of the shares at the deferred taxing point, less the cost base of the options, | · your deferred taxing point will be the cessation time of the options. | The cessation time for your options will be the earliest of the following: | · when your employment in respect of which the rights were acquired ceases; | · the time when the last restriction attaching to the shares you acquired by exercising the rights ceases to have effect; and | · the end of the 10 year period starting when you acquired the rights. | The cessation time for your options occurred when you exercised them in 2011. Therefore, you must include the discount you received on your options in your income tax return at this time. | Question 2 | You cannot delay the inclusion of the discount on the options you received under the ESS. The discount must be included in your income tax return at cessation time as outlined above. For an option for which tax is deferred, the option is taken to have been re-acquired immediately after the deferred taxing point. This resets the cost base of the option to its market value at this time, and resets the acquisition time. Therefore, the market value is taken to be the time when the discount on the option was calculated. In your case, the market value will be calculated when you exercised the options. Once the discount has been included in your income tax return the options you exercised will be assessable under the capital gains tax provisions when you sell the shares. You should note that the Commissioner does not have the discretion to vary the deferred taxing point of interests acquired under an ESS.


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