Some companies encourage employees to participate in employee share schemes by offering them discounted shares or rights (including options) to acquire shares. Where the scheme complies with the employee share scheme income tax rules (ESS rules), an employee can choose when they include the discount given on the shares or rights in their assessable income.
The employee includes the discount in their assessable income:
- In the income year they acquire shares or rights, if the employee makes an election under the ESS rules. The discount is calculated at the date the shares or rights were acquired, or
- In the income year that cessation time of the shares or rights occurs. For shares, this is usually the earlier of employment ceasing or when the disposal restrictions cease and forfeiture conditions expire on the shares. For rights, this is usually the earlier of employment ceasing or the exercise of the rights to acquire the shares. The discount is calculated at the date of cessation time.
The first element of the cost base of the shares or rights is their market value as determined under the ESS rules at the date the discount was calculated. If a CGT event happens in relation to the shares or rights, the capital gain or capital loss is calculated under the rules that apply to that event.
If an arm's length CGT event A1 (sale or disposal of a CGT asset) happens or a CGT event E1 (creating a trust over a CGT asset), E2 (transferring a CGT asset to a trust) or E5 (beneficiary becoming entitled to a trust asset) happens in relation to the shares or rights (or any shares acquired as a result of exercise of the rights) within 30 days of cessation time, the capital gain or capital loss is disregarded.
If an employee makes an election, special rules apply to employee shares or rights that a trust acquires on their behalf after 5.00pm (by legal time in the ACT) on 27 February 2001. Under the rules:
- capital gains or capital losses that arise while the shares or rights are held in trust are attributed to the employee and recognised when the employee disposes of those shares or rights, and
- for the employee, the 12-month ownership requirement for the 50% CGT discount commences from the date the shares or rights are acquired by the trustee on behalf of the employee.
Elections made under the ESS rules must be by the employee in writing and should be kept with their tax return for the relevant income year.
For more information, refer to ESS interests with a taxing point before 1 July 2009.