Private ruling: capital gains tax – cost base
Date of advice: 9 December 2016
Published: January 2017
Ruling period: Income year ending 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Will the options granted in 2012 and 2013 be assessed under Division 83A of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Were the restricted shares acquired when the options were exercised under section 109-10 of the ITAA 1997? | A2: Yes. | Q3: Will the first element of the cost base of the restricted shares allotted as a result of exercising of the options granted in 2012 be the sum of the cost base of the original options plus the exercise price? | A3: Yes. | Q4: Will the first element of the cost base of the restricted shares arising in relation to the exercising of the options granted in 2013 be the sum of the cost base of the original options plus the exercise price? | A4: Yes.

Relevant facts and circumstances: You participated in an plan offered by your employer during the 2011-12 and 2012-13 income years under which you were granted options in both income years. The acquisition price of the options was at least equal to the market value of the options on the grant date. You also participated in an employee share scheme (ESS) offered by your employer and were issued ESS interests in numerous income years. Your employer’s group of companies was restructured and as a result of the restructure you received options in the parent company in exchange for your original options. The restructure met the conditions for the scrip for scrip roll-over to be available to the employees. You made the choice for the scrip for scrip roll-over to apply to your options. In 2014, you signed a power of transfer for the exercise of some of your options granted in 2012 and the immediate sale of the resulting restricted shares. You included a capital gain amount in the amended assessment of the income year in which the restricted shares were sold. In 2016, you exercised some of the options that you had been granted in 2012 and 2013.

Relevant legislative provisions: Income Tax Assessment Act 1997 Part 3-1 | Income Tax Assessment Act 1997 Part 3-3 | Income Tax Assessment Act 1997 Section 102-20 | Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 124-785 | Income Tax Assessment Act 1997 Division 83A | Income Tax Assessment Act 1997 Section 83A-10, | Income Tax Assessment Act 1997 Subdivision 83A-B | Income Tax Assessment Act 1997 Section 83A-25 | Income Tax Assessment Act 1997 Subdivision 83A-C | Income Tax Assessment Act 1997 Section 83A-105 | Income Tax Assessment Act 1997 Section 83A-110 | Income Tax Assessment Act 1997 Section 83A-120

Reasons for decision: Detailed Reasoning - Employee share schemes: All references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise noted. Division 83A applies to shares, rights and stapled securities acquired under an employee share scheme (ESS) on or after 1 July 2009. An ESS is defined in subsection 83A-10(2) as a scheme under which ESS interests in a company are provided to employees, or associates of employees, of the company, or a subsidiary of the company, in relation to the employee’s employment. Division 83A applies when ESS interests such as shares, stapled securities and rights (including options) to acquire shares and stapled securities in a company are provided to its employees in relation to their employment. Where an employee acquired ESS interests at a discount under the ESS, the discount is taxed under these rules. When the ESS provisions apply, generally the ESS interests are exempt from CGT implications until the interest has been taxed under the ESS rules. Where an employee does not acquired ESS interests at a discount, the ESS rules will not apply. However, the benefits given in relation to the ESS interests may be taxed under other provisions of the taxation law, such as the capital gains tax regime | Detailed Reasoning - Application to your situation: You were granted options by your employer in 2012 and 2013. Based on the information and documentation provided, it is viewed that your 2012 and 2013 options are ESS interests, but are not subject to Division 83A for the following reasons: Based on the information and documentation provided, it is the Commissioner’s view that your 2012 and 2013 options are ESS interests, but are not subject to Division 83A for the following reasons: ● For ESS interests to be subject to Division 83A, they must be acquired at a discount. Based on the information provided, it is not viewed that you had acquired the options at a discount, but had paid the market value for the options, which had been deducted from your pay; and ● From 1 July 2009, if employers provide ESS interests at a discount to their employees or their associates, they are subject to reporting obligations. They must provide an ESS statement to their employees by 14 July after the end of the financial year and they must also provide an ESS annual report to the Australian Taxation Office by 14 August after the end of the financial year. In your case, your employer has not provided an ESS statement in relation to either the 2012 or 2013 options to either you or to the Australian Taxation Office (ATO). The fact that no ESS statements have been provided by your employer supports that the options were not issued at a discount. Based on the information and documentation provided, and as outlined above, it is not viewed that you had been granted the options at a discount and they are not assessable under the ESS provisions. Therefore, the options will assessed under the capital gains tax provisions as follows: | Detailed Reasoning - Capital gains tax: The main capital gains tax (CGT) provisions are contained in Part 3-1. Under the CGT provisions a share acquired as the result of exercising an option is viewed as being acquired when the contract resulting from the exercise of the option is entered into and not when the contract for the acquisition of the option was entered into. A capital gain or capital loss is made when a CGT event happens to a CGT asset you own. The most common event is CGT event A1 which happens when a person disposes of their ownership interest in a CGT asset to someone else. | Detailed Reasoning - Application to your situation: As the ESS provisions do not apply to your 2012 and 2013 options, the CGT provisions will apply to determine whether or not a capital gain or capital loss will occur in relation to the disposal of the shares resulting from the exercising of the options. Due to the restructuring of your employer’s group of companies, you are viewed as having disposed of your original options granted in 2012 and 2013 and having received the same number of options (the replacement options) in the parent company in exchange for your original options. You made a capital gain as a result of the restructure and made the choice for the scrip for scrip roll-over to apply to your options. As a result of that choice, you were able to disregard the capital gain made on the disposal of your original options and are viewed as having acquired the replacement options for the cost base of your original options, being the amounts you paid for the options (the purchase price). In 2016 you exercised some of your options and received restricted shares. When calculating whether you have made a capital gain or capital loss on the sale of the restricted shares, the first element of the cost base of each of the restricted shares will be calculated as follows: The cost base of each of your original options, being the purchase price paid for each option in 2012 and 2013 Plus The exercise price of each option (converted into Australian currency on the date of exercise).