Private ruling: CGT - ESS - disposal of shares by associate
Date of advice: 26 February 2024
Published: 15 April 2024
Ruling period: Year ending 30 June 20YY | Year ending 30 June 20YY
Date scheme commenced: DDMM20YY

Ruling: Q1: Does the trust make a capital gain due to the disposal of the shares? | A1: Yes. Section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) is about disposal of a CGT asset: CGT event A1. You make a capital gain if the capital proceeds from the disposal are more than the asset's cost base (subsection 104-10(4) of the ITAA 1997). | Q2: Does the cost base of the shares include the market value of the options calculated as at the date when the trust (as associate of the employee) acquired the options to purchase them shares, the market value on the date of acquisition? | A2: No. As per subsection 83A-30(2) of the ITAA 1997, the ESS market valuation substitution rule does not apply to start-ups and there is no market value substitution rule in capital gains tax (CGT) where CGT assets of this nature are acquired from a company. Therefore, the market value and exercise price to be used as the cost base of the shares was $X per option.

Relevant facts and circumstances: On DDMMYYYY X Pty Ltd A.C.N. XXX XXX XXX (the employer) offered X as the employee the right to acquire X options under an Employee Share Scheme (ESS) Option Plan that satisfied the start-up conditions. Under the specific terms of the Employee Option Plan Rules (the rules) written by the employer and subject to the employee satisfying all relevant vesting conditions, upon exercise, each option entitled the owner to acquire one ordinary share in the capital of the company. The employee was entitled to accept the offer only in respect of all options and not only in respect of some of the options. The vesting conditions were satisfied with X of the options vesting 1 month after the start date of DDMMYYYY. On DDMMYYYY the employee accepted the offer of X options. The employee requested that the options be allocated to the trust as their associate and the company (as employer) agreed. The market value and exercise price was $X per option. The trust later exercised the options. The trust (X as Trustee for the Trust) disposed of the shares acquired by exercising the options on DDMMYYYY and made a capital gain on the sale. The options were exercised within the exercise period of 180 months from the start date letter of DDMMYYYY.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 83A | Income Tax Assessment Act 1997 subsection 83A-30(2) | Income Tax Assessment Act 1997 Part 3-1 | Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 section 134-1