ESS interests with a taxing point before 1 July 2009

The tax rules applying to employee share scheme interests (ESS interests) acquired under an ESS before 1 July 2009 that also had a taxing point before 1 July 2009 are different to the current rules.

This information explains those rules – which were contained in former Division 13A of Part III of the Income Tax Assessment Act 1936 – with examples of some common issues. We recommend you read it in conjunction with the Guide to capital gains tax.

The Division 13A rules were repealed, effective from 14 December 2009. Division 83A of the Income Tax Assessment Act 1997 contains rules that apply to ESS interests (shares or rights) acquired on or after 1 July 2009.

The Division 83A rules also apply to some shares or rights that were acquired before 1 July 2009 under transitional rules. These shares and rights are known as transitioned interests. However, the Division 13A rules are still relevant to determining if the interests you acquired before 1 July 2009 are transitioned interests. The Division 13A rules continue to apply (despite its repeal) to shares or rights that did not transition to the new rules. The latest possible deferred taxing point for these interests was 30 June 2019. This means there will be no income reportable on these interests in the 2019–20 income year and onwards.

For ESS interests acquired before 1 July 2009 to which a cessation time has not yet happened, the deferred taxing point will be calculated with reference to the rules in Division 13A. However, these ESS interests, as well as all ESS interests acquired on or after 1 July 2009 under Division 83A, will be subject to the new CGT rules outlined under Division 83A. This document contains information about the CGT rules that apply to ESS interests with a cessation time prior to 1 July 2009.

Find out about:

• What are transitioned interests?
• What are not transitioned interests?
• Acquiring shares or rights from an ESS
• Qualifying shares or rights
• Cessation time
• Disposing of shares or rights acquired from an ESS
• Stapled securities and rights to acquire them

See also:

• Employees
• Stapled securities and rights to acquire them

What are transitioned interests?

The new rules in Division 83A apply to shares or rights (ESS interests) that you acquired before 1 July 2009 if:

• they are qualifying shares or rights under the old rules, and
• you have not elected to be taxed upfront under the rules, and
• a cessation time has not happened to the shares or rights before 1 July 2009 under the old rules.

Under the transitional rules, some of the old rules in Division 13A are preserved. Also, some of the new rules do not apply, or are modified in the way that they apply to a transitioned interest.

What are not transitioned interests?

The old rules continue to apply to:

• a share or right that was not qualifying under the old rules
• a qualifying share or right where you elected to be taxed upfront under the old rules
• a qualifying share or right where a cessation time had happened to the share or right before 1 July 2009 under the old rules.

Acquiring shares or rights from an ESS

You acquire shares or rights from an ESS if the shares or rights are acquired, whether directly or indirectly, in relation to your employment or in relation to any services you provide. If you pay any money, or provide any other consideration, to acquire the shares or rights, the consideration must be less than the market value of the shares or rights at the time you acquire them.

Amounts you forgo under an effective salary sacrifice arrangement (see paragraphs 19 to 23 in TR 2001/10) do not form part of the consideration provided to acquire shares or rights from an ESS.

The date you acquire shares or rights may not necessarily be when the shares or rights are granted or issued to you. You acquire a share or a right when:

• the share or right is transferred to you, other than by a share issue
• in the case of a share, the share is allotted to you
• in the case of a right, your employer or another person creates a right (to acquire a share) in you
• you otherwise acquire a legal interest in the share or right
• you acquire a beneficial interest in the share or right.

In relation to rights, determining the date a right is created in you will depend on the facts of each case. You may receive rights to acquire shares under an individual employment contract or under a broad based employee share plan. Generally, your rights will be acquired from an ESS when your employment contract is entered into or when you accept an offer received under an employee share plan.

However, your rights to acquire shares may also be subject to shareholder approval or your employer may retain the right to determine whether you ultimately receive shares or a cash equivalent. Under these circumstances, you will not acquire a right (to acquire a share) until shareholder approval is given or your employer decides that your rights will be satisfied by shares and not cash.

See also:

• TD 2014/21EC: Income tax: where a right to acquire a beneficial interest in a share is granted subject to shareholder approval, is the right an 'indeterminate right' within the meaning of subsection 83A-340(1) of the Income Tax Assessment Act 1997?

Under some ESS, you may be able to nominate an associate to acquire the shares or rights. Special rules apply in this circumstance.

The transitional rules affecting ESS include a rule for indeterminate rights. Indeterminate rights are those rights you acquire from an employer where your entitlement to a share or a specific number of shares is uncertain. For example, you may be provided with a right to acquire, at a future time:

• shares with a specified total value, rather than a specified number of shares
• a number of shares to be determined at a later time
• either shares or cash (at the discretion of the employer), or
• shares or a cash equivalent (where the entitlement to shares is subject to shareholder approval).

If you acquired the indeterminate right before 1 July 2009, and the right becomes a right to acquire a share on or after 1 July 2009, the old rules will apply as if the right had always been a right to acquire the share from the time that the indeterminate right was acquired.

So, if the discount on your rights would have been assessable at acquisition, it will need to be included in the income year the rights were acquired. If under the old rules, tax is deferred on the right beyond 1 July 2009, the right will be transitioned into the new rules consistent with other transitioned interests.

When are shares or rights considered to be not acquired from an ESS

Shares or rights will not be considered to be acquired from an ESS in either of the following situations:

• if you pay money or provide other consideration to acquire shares or rights that is equal to, or more than, their market value at the time they are acquired
• when you exercise rights that you acquired from an ESS – the shares that you acquire from exercising these rights are not considered to also be acquired from an ESS.

While Division 13A does not apply to these shares or rights, the shares or rights may still be assessable under other provisions of the Income Tax Assessment Act 1936 and the Income Tax Assessment Act 1997 (including the CGT provisions).

In some circumstances, a right acquired from an ESS that later lapses may also be deemed not to have been acquired.

See also:

• Lapsing of rights

Determining the market value of shares and rights

Division 13A sets out a number of valuation rules to determine the market value of shares or rights acquired from an ESS. The rules that will apply to determine the market value of shares or rights will depend on whether or not shares or rights are listed on an approved stock exchange.

If asked, your employer must provide information to enable you to calculate the market value of shares or rights.

Listed shares or rights

If the shares or rights are traded on an approved stock exchange, you can determine the market value of the shares or rights by using the five-day weighted average, which is the prices at which the shares or rights were traded over a one week period. That is, an average that takes into account the proportional relevance of the volume of shares traded at different prices, ending on the date the shares or rights are being valued for (for example, on the date the shares or rights are acquired).

If, during the one week period, the shares or rights have not been traded, the market value is taken to be the last offer price to buy the shares or rights in that period. If no offers have been made, then the market value of the shares or rights must be determined in accordance with the market valuation rules for unlisted shares or rights.

If listed shares offered from an ESS are acquired in accordance with a wider public offering of shares, different valuation rules may apply.

Unlisted shares or rights

The market value of unlisted shares is determined by either of the following:

• an arm’s length value of the share, made by a registered company auditor in a written report
• in accordance with a reasonable method approved by us.

The market value of unlisted rights will be the greater of the following two amounts:

• the market value of the underlying shares (on the date the rights are being valued for) less the lowest exercise price. If the lowest exercise price is nil or can’t be determined, then the rights are treated as having the same market value as the underlying shares, or
• the value determined by using the formula and tables set out in sections 139FJ to FN of the Income Tax Assessment Act 1936. Additionally, if the life of the rights is more than 10 years, an arm’s length value must also be determined by a qualified valuer in a written report. The arm’s length value must be used if it is greater than the value determined using the formulas and tables (based on an exercise period of 10 years).

Tax implications of acquiring shares or rights from an ESS

In addition to any capital gains tax that may apply when you dispose of shares or rights from an ESS, you must include in your assessable income what’s known as the ‘discount’ received on the shares or rights.

Generally, the discount is included in your assessable income in the income year you acquire the shares or rights. The amount of the discount is calculated at the date the shares or rights are acquired and is the difference between the market value of the shares or rights and the consideration, if any, that you provide to acquire them.

However, if the shares or rights are qualifying shares or rights, there are two alternative tax concessions that may be available to you when calculating and including the discount in your assessable income.

See also:

• Qualifying shares or rights

Tax implications if your associate acquires shares or rights from an ESS

If you negotiate for an associate to acquire shares or rights from an ESS (in relation to your employment or services you provide), the tax law still requires you to include the discount in your assessable income rather than your associate's.

Lapsing of rights

If you acquire rights from an ESS, you will be treated as never acquiring the rights if both of the following two requirements are satisfied:

• you lose the rights without having exercised them, and
• the company, in which you had rights to acquire shares, was your employer (or was the holding company of your employer) at the time you acquired the rights.

If you satisfy these requirements and have previously included the discount related to the rights in your assessable income, you can amend your assessment to exclude the discount. The normal time limits for amending prior-year assessments (generally two years) will not apply.

If you negotiated for an associate to acquire the rights, you will not be able to amend prior-year assessments to exclude the discount from your assessable income if the rights are later lost. This is because it is your associate, not you, who acquired the rights, and your associate was not employed by the company when the rights were issued.

 

Qualifying shares or rights

A share in a company will be a qualifying share if it satisfies all of the following requirements:

• the share is acquired by you from an ESS
• the company is your employer or your employer's holding company
• the shares or rights to shares available from the ESS are ordinary shares or rights to ordinary shares
• after acquisition of the share, you do not hold a legal or beneficial interest of more than 5% of the shares in the company
• after acquiring the share, you are not in a position to cast, or control the casting of, more than 5% of the votes at the company's general meeting
• when you acquired the share, at least 75% of the permanent employees of your employer were, or at some earlier time had been, entitled to acquire shares or rights to shares from an ESS of your employer or its holding company.

A qualifying right must satisfy the same requirements, except the last requirement above.

Shares or rights acquired by your associate

To be a qualifying share or right, one of the requirements is that the company in which the shares or rights are issued is the employer of the person who acquires the shares or rights (or is the holding company of the employer).

If your associate acquires the shares or rights in relation to your employment or services and is not an employee of the company or holding company issuing the share or right, the shares or rights will not be qualifying shares or rights.

This means that you, as the person required by law to include the discount in your assessable income, must include the discount in the income year in which your associate acquires the shares or rights.

Tax concessions available for qualifying shares and rights

The first concession available for qualifying shares or rights is that you can defer including the discount in your assessable income until a later year of income, up to a maximum of 10 years. The year you must include the discount in your assessable income will be the year in which an event, known as a cessation time, occurs.

Instead of deferring the discount, the second concession allows you to elect to be assessed upfront on all qualifying shares or rights you acquired in the income year. By making an election (often referred to as a section 139E election), the discount will be included in your assessable income in the year you acquire the qualifying shares or rights. Under this concession, if certain conditions, known as ‘exemption conditions’, are satisfied, you are only required to include the discount in your assessable income to the extent that it is greater than $1,000.

The deferral of the discount is the default concession for qualifying shares and rights. This means that, unless you make an election, the discount on all qualifying shares or rights will not be assessed until a cessation time occurs. The $1,000 exemption is not available if the discount is declared at cessation time.

Electing to have qualifying shares or rights assessed in the year you acquire them

For 2008–09, if you want to be assessed upfront on the discount you receive on qualifying shares or rights, you must make an election in your tax return for that year. If you make an election, the election will apply to all qualifying shares or rights you acquired in that income year.

To make an election in your 2008–09 tax return, you must complete two labels at question 24 ‘Other Income’:

• you must indicate ‘yes’ that you want to make an election, and
• you must include the assessable discount amount for all qualifying shares and rights you acquired in the income year.

If you do not make an election, the discount will not be included in your assessable income until the income year in which an event, known as a cessation time occurs.

Making an election at a later time

The Commissioner of Taxation has discretion to allow you to make an election at a later time.

When considering whether to exercise the discretion, the Commissioner will consider the following factors:

• the circumstances which led to you not making the election in the required timeframe for the relevant income year
• your explanation of the time delay between lodging your income tax return and the date of your request to make a late election
• whether it would be fair and equitable in the taxpayer's circumstances for the Commissioner to exercise his discretion.

If you want the ATO to consider allowing you to make a late election, you must make a request in the approved form.

Obtaining exemption for the first $1,000 of the discount

The $1,000 exemption applies if you have elected to be assessed on the discount of qualifying shares or rights upfront, and if the ESS from which you acquire the shares or rights meets the following conditions:

• the scheme did not have any conditions that could result in any employee forfeiting ownership of the shares or rights
• the scheme was operated so that no recipient would be permitted to dispose of the shares or rights (or shares acquired on exercise of the rights) before the earlier of  
  • three years after their acquisition (or for shares acquired on exercise of the rights, three years after acquisition of the rights)
  • the time their employment ceased with the employer
   
• the ESS operated on a non-discriminatory basis (including the provision of financial assistance in respect of the acquisition of shares or rights) meaning:
  • participation in the scheme is open to at least 75% of permanent employees
  • the time for acceptance of each offer is reasonable
  • the essential features of each offer are the same for at least 75% of permanent employees.
   

If you have acquired separate share or right issues in an income year, and only one issue meets the exemption conditions, the discount can only be reduced in relation to the issue of shares or rights that meets the exemption conditions. Refer to Example 8.

Exemption is automatic in some circumstances

For 2008–09, you are deemed to have made an election if:

• your qualifying shares or rights are from an ESS that meets the exemption conditions, and
• the total discount related to the shares or rights is not more than $1,000.

This means that you are not required to make an election in your tax return for these qualifying shares or rights, nor are you required to include the discount in your assessable income.

See also:

• Example 7

However, if you have acquired shares or rights that meet the exemption conditions, and the discount is more than $1,000, you will still need to make an election as well as return the amount of the discount in excess of the $1,000 exemption in your tax return in the year you acquire the shares or rights.

For income years prior to 2008–09, you still need to make an election before lodging your tax return even if your total discount amount on all qualifying shares or rights acquired in the year is $1,000 or less, and the exemption conditions have been met.

Calculating the discount when you make an election

The discount is calculated as at the date the shares or rights are acquired, and is the market value of the shares or rights less any consideration you provide to acquire the shares or rights. If the ESS from which the shares or rights are acquired meets the exemption conditions, the total discount is also reduced by $1,000.

 

Cessation time

The 'cessation time' will differ, depending on whether shares or rights have certain restrictions or conditions attached to them.

Shares

For shares that have no restrictions preventing their disposal and no conditions that may result in you forfeiting the share, the cessation time is when you acquire the shares.

For shares that do have such restrictions or conditions, the cessation time is the earliest of the following:

• when you dispose of the shares
• the later of when the disposal restrictions cease to have effect and the forfeiture conditions cease to have effect in relation to the shares
• when your employment in respect of which the shares were acquired ceases
• 10 years from the date you acquired the shares.

Rights

The cessation time for rights is the earliest of the following:

• when you dispose of the rights (other than by exercise)
• when your employment in respect of which the rights were acquired ceases
• when the rights are exercised, if the shares that are acquired by exercising the rights have no restrictions or conditions affecting their subsequent disposal or you forfeiting ownership of the shares
• if there are such restrictions or conditions on the shares acquired by exercising the rights, when the last of the restrictions or conditions cease to have effect
• ten years from the date you acquired the rights.

Disposal restrictions

Disposal restrictions are restrictions imposed by the employer or administrator of the ESS that prevent the employee from disposing of shares for a certain period of time. The time disposal restrictions cease to have effect may be relevant to determining your cessation time.

Disposal restrictions will cease to have effect on the date you are first able to dispose of your shares. If you choose not to dispose of your shares at this time, and at a later time the shares again become restricted, the cessation time will still be the first date on which you were able to dispose of the shares.

 

Calculating the discount at cessation time

The method for calculating the discount at cessation time will depend on whether you dispose of the shares or rights (or the shares acquired as a result of exercising the rights) within 30 days of the cessation time.

If you dispose of the shares or rights at arm’s length within 30 days of cessation time, the discount is calculated as the amount of any consideration you receive for their disposal minus any consideration you provided to acquire the shares or rights.

If you don’t dispose of shares or rights at arm’s length or within 30 days of the cessation time, the discount is calculated as the market value of the share or right (or the market value of the share acquired as a result of exercising the right) at cessation time minus any consideration you provided to acquire the shares or rights.

In relation to rights, the discount is also reduced by any amount you pay to exercise the right.

 

Deducting brokerage costs when calculating the discount

You cannot include brokerage costs when determining the amount of the discount to include in your assessable income. However, if you dispose of your shares (including shares that you acquired via the exercise of your rights) or rights within 30 days of the cessation time, any brokerage costs you incur as a result of selling your shares or rights are a deductible expense under section 8-1 of the Income Tax Assessment Act 1997.

If you do not dispose of your shares or rights within 30 days of the cessation time, you cannot include brokerage costs as a deductible expense. However, when you dispose of the shares or rights, you will be able to include brokerage costs as part of your cost base when calculating your capital gain or loss.

See also:

• Example 17

Disposing of shares or rights acquired from an ESS

CGT implications

Subdivision  130-D of the Income Tax Assessment Act 1997 contains special rules for ESS to ensure there is no double taxation on income resulting from the acquisition and disposal of shares or rights acquired from these schemes.

When a CGT event happens to a share or right acquired from an ESS, the capital gain or loss will need to be calculated in accordance with the rules applicable to that event. However, the CGT implications will vary depending on the CGT event that occurs, and whether you have elected to assess the discount upfront or defer assessing the discount until a cessation time occurs.

CGT implications when exercising rights to acquire shares

While a CGT event happens when you exercise rights to acquire shares (CGT event C2: cancellation, surrender or similar ending), any capital gain or loss is disregarded. However, when you dispose of the shares you have acquired through the exercise of the rights, you will need to account for any capital gain or loss.

See also:

• Example 15

Entitlement to the 50% CGT discount

Regardless of how the discount has been assessed, if you hold the shares or rights for 12 months or longer, you are eligible for the 50% discount on any capital gains you make on the disposal of the shares or rights.

CGT implications for shares or rights acquired by your associate

If you negotiate for shares or rights from an ESS (that are provided in relation to your employment or to services you provide) to be acquired by your associate rather than yourself, you will not have any capital gains tax implications. However, as explained in Tax implications if your associate acquires shares or rights from an ESS, you will still be liable to include the income related to acquiring the shares or rights in your assessable income.

Your associate will need to consider the CGT implications when they dispose of the shares or rights.

If you allocate shares or rights to an associate after you have acquired them, you will have CGT implications because you have disposed of the shares or rights by providing them to your associate.

CGT implications when disposing of shares or rights on which the discount was assessed upfront

If you are assessed on the discount upfront on your shares or rights, you will need to account for any capital gain or loss when a CGT event happens in relation to those shares or rights.

When calculating the capital gain or loss, the relevant market value to include as the first element of the cost base or reduced cost base will be the market value of the shares or rights on the date you acquired them. The acquisition date of shares, which were attained by exercising rights that were acquired under an ESS, is the date the rights were exercised.

 

 

CGT implications when disposing of shares or rights on which the discount was assessed at cessation time

When you are assessed on the discount received on qualifying shares or rights at cessation time, whether there are any CGT implications when you dispose of the shares or rights (or the shares acquired via the exercise of the rights) will depend on how long you hold onto the shares or rights after the cessation time.

The capital gain or loss is disregarded if, within 30 days of cessation time, the following CGT events happen (at arm’s length):

• A1 (disposal of CGT asset)
• C2 (cancellation, surrender or similar ending)
• E1 (creating a trust over a CGT asset)
• E2 (transferring a CGT asset to a trust)
• E5 (beneficiary becoming entitled to a trust asset)
• I1 (taxpayer stops being an Australian resident).

The capital gain is disregarded because any change in value on the shares or rights is assessed as the discount at cessation time.

If a CGT event happens to shares or rights after 30 days of the cessation time, you will need to account for any capital gain or loss. When calculating your capital gain or loss, you will need to include the market value of the shares or rights at cessation time as the first element of your cost base or reduced cost base.

 

Stapled securities and rights to acquire them

Stapled securities are created when two or more different securities are contractually bound together so they cannot be sold separately. Many different types of securities can be stapled together. A common example of a stapled security is when a share in a company is stapled to a unit in a finance trust.

From 1 July 2006, the ESS rules also apply to certain stapled securities and rights to acquire stapled securities.

Tax implications of acquiring stapled securities (or rights to acquire them) from an ESS

If you acquire stapled securities, or rights to acquire stapled securities, the ESS rules in Division 13A will assess any discount you receive on the stapled securities or rights to acquire stapled securities if all of the following requirements are satisfied:

• you acquire the stapled securities, or the rights to acquire stapled securities, on or after 1 July 2006, in respect of your employment
• each stapled security includes one ordinary share in a company, and one or more interests in a company or unit trust
• the stapled securities are listed for quotation on the official list of the Australian Securities Exchange as a stapled security
• the stapled securities, or the rights to acquire stapled securities, meet the qualifying conditions in Division 13A.

If you satisfy these requirements, Division 13A will apply to the stapled securities, or rights to acquire stapled securities, in the same way as it applies to qualifying shares and rights acquired from ESS. This means that you may be entitled to use the tax concessions available under Division 13A.

See also:

• Tax concessions available for qualifying shares and rights

However, there are some modifications to the qualifying conditions and cessation times for stapled securities and rights to acquire stapled securities. These modifications are further explained below.

If your stapled securities, or rights to acquire stapled securities, do not satisfy all of the above requirements, the individual interests of the stapled securities are treated separately for tax purposes.

Qualifying stapled security or a qualifying right to acquire a stapled security

The qualifying conditions that apply to shares or rights acquired from an ESS also apply to stapled securities and rights to acquire stapled securities.

See also:

• Qualifying shares or rights

However, because stapled securities, and rights to acquire stapled securities, can consist of shares or units in different entities, the following qualifying conditions have been modified:

• the requirement that at least 75% of the permanent employees of the employer had been entitled to participate in an ESS is modified so that it only applies to the stapled entity that is your employer, rather than to all of the stapled entities
• the requirement that you do not hold more than 5% legal or beneficial interest in the company is modified so that it is satisfied if you do not hold more than 5% of the shares in any company that is a stapled entity, and more than 5% of the units in any unit trust that is a stapled entity of the stapled security
• the requirement that you do not control more than 5% of the voting rights in the company is modified so that it only applies to your interests in the companies with ordinary shares that form part of the stapled security.

Cessation time for stapled securities or rights to acquire them

The events that trigger a cessation time for qualifying shares and rights also apply to stapled securities and rights to acquire stapled securities.

See also:

• Cessation time

In addition, stapled securities and rights to acquire stapled securities have two more events that will trigger a cessation time:

• when any part of the stapled security ceases to be stapled together
• when the stapled security ceases to be listed for quotation on the official list of the Australian Securities Exchange as a stapled security.

CGT implications when disposing of stapled securities or rights acquired from an ESS

The CGT rules that apply to qualifying shares and rights also apply to each CGT asset in a stapled security. However, the CGT implications will vary, depending on the CGT event that occurs and whether you have been assessed on the discount from your stapled securities or rights upfront, or have deferred assessing the discount until a cessation time occurs.

• Disposing of shares or rights

For stapled securities or rights to acquire stapled securities that are not assessed under Division 13A, capital gains and losses are determined separately for each security stapled together.

See also:

• Stapled securities
• Guide to capital gains tax
• ESS – Foreign income exemption for Australian residents and temporary residents

For help applying this information to your own situation, phone us on 13 28 61 between 8.00am and 6.00pm, Monday to Friday.

The employee share scheme (ESS) rules applying to ESS interests acquired before 1 July 2009 with a taxing point that occurred before 1 July 2009 are different to the current rules.