Employee share schemes - answers to frequently asked questions by employees (Current to 14 December 2009)

Introduction

This document contains frequently asked questions on former Division 13A of Part III of the Income Tax Assessment Act 1936.

The employee share scheme (ESS) rules contained in Division 13A that applied to shares or rights acquired before 1 July 2009 have been repealed effective from 14 December 2009. A new Division 83A in the Income Tax Assessment Act 1997 contains employee share scheme rules that apply to shares or rights acquired on or after 1 July 2009.

The new employee share scheme rules in Division 83A will 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 old rules in former Division 13A will still be relevant to determining if the interests you acquired before 1 July 2009 are transitioned interests. The previous rules in Division 13A will continue to apply (despite its repeal) to shares or rights that do not transition to the new rules.

This document contains information about the old rules in Division 13A.

For more information about the employee share scheme rules in Division 83A, see Employee share schemes - guide for employees.

For ESS interests that were 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.

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.

The tax law contains special rules for shares and rights acquired from employee share schemes, for both income and capital gains tax (CGT) purposes. These rules are contained in Division 13A of the Income Tax Assessment Act 1936 and, for CGT, in Subdivision 130-D of the Income Tax Assessment Act 1997.

This information answers some common questions and provides examples on how these rules operate when assessing income resulting from the acquisition of these shares and rights, and when assessing capital gains on the disposal of these shares and rights.

These answers provide a general guide only. We recommend they be read in conjunction with the Guide to capital gains tax. If you require more certainty in how the law applies to your circumstances, you should consider applying for a private ruling.

A summary has also been included to provide an overview of how income and capital gains are assessed in relation to shares and rights acquired from employee share schemes.

From 1 July 2006, the employee share scheme rules also apply to certain stapled securities and rights to acquire stapled securities. Refer to Questions about stapled securities and rights to acquire stapled securities for more information.

Questions about acquiring shares or rights from an employee share scheme

1. Have I acquired shares or rights from an employee share scheme?

You acquire shares or rights from an employee share scheme 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 Taxation Ruling TR 2001/10) do not form part of the consideration provided to acquire shares or rights from an employee share scheme.

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 employee share scheme 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.

Under some employee share schemes, you may be able to nominate an associate to acquire the shares or rights. Special rules apply in this circumstance. Refer to question 5 for more information.

The transitional rules affecting employee share schemes 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.

That is, 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.

Example 1 - acquiring rights

Saskia signs an employment contract with her new employer, Delco Corporate, on 10 March 2005. The contract states that Saskia's remuneration package will consist of a salary, car allowance, cash bonus and 10,000 rights to acquire shares in the company (at no cost to Saskia). The rights to acquire shares, however, are subject to shareholder approval at the next Annual General Meeting (AGM). If the shareholders do not approve the rights to acquire shares, the contract provides that Saskia will instead receive an equivalent amount of cash remuneration.

On 16 May 2005, the shareholders at the AGM give their approval for the rights to acquire shares.

The point at which Saskia acquires the rights from an employee share scheme is when the rights (to acquire shares) are created in her. In addition to salary, a car allowance and cash bonus, Saskia's employment contract includes further rights to remuneration that will be satisfied by either rights to acquire shares or a cash equivalent depending on shareholder approval.

When the shareholders give their approval on 16 May 2005, rights to acquire shares are created in Saskia such that she has acquired rights from an employee share scheme.

2. When are shares or rights not acquired from an employee share scheme?

Shares or rights will not be considered to be acquired from an employee share scheme 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 employee share scheme - the shares that you acquire from exercising these rights are not considered to also be acquired from an employee share scheme.

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 employee share scheme that later lapses may also be deemed not to have been acquired. See question 6 for more information.

3. How do I determine 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 employee share scheme. 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.

3a. How do I determine the market value of 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 weighted average of the prices at which the shares or rights were traded over a one week period (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). This is often referred to as the five day weighted average.

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 employee share scheme are acquired in accordance with a wider public offering of shares, different valuation rules may apply.

3b. How do I determine the market value of 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 the ATO.

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.
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. If the arm's length value is greater than the value determined using the formulas and tables (based on an exercise period of 10 years), then the arm's length value must be used.

The Employee share scheme calculator will calculate the ESS assessable discount amount for unlisted rights.

4. What are the tax implications of acquiring shares or rights from an employee share scheme?

In addition to any capital gains tax that may apply when you dispose of shares or rights from an employee share scheme, 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 concessions that may be available to you when calculating and including the discount in your assessable income. Refer to Questions about qualifying shares or rights for more information.

Example 2 - discount assessable on non-qualifying shares

Eliza acquires 800 employee class shares for free from her employer, Qbiz, on 10 March 2008 at a market value of $2.50 per share. The employee class shares are not ordinary shares because they have preferential rights to the payment of dividends. Therefore, they are not qualifying shares and the discount will need to be included in Eliza's assessable income in the year she acquired the shares.

Eliza calculates the discount as:

market value on acquisition of the shares 800 shares $2.50	$2,000
Less
consideration paid to acquire shares	Nil
discount equals	$2,000

Eliza includes the discount of $2,000 in her assessable income for the 2008 income year.

Refer to example 13 for a discussion of the CGT implications for Eliza when she sells the shares.

5. What are the tax implications if my associate acquires shares or rights from an employee share scheme?

If you negotiate for an associate to acquire shares or rights from an employee share scheme (that are provided 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.

Example 3 - rights allocated to associate

As part of his remuneration package, Derek negotiates for his spouse, Sally, to acquire 700 rights from his employer, D2D Finance Company, on 21 September 2007. The rights provided to Sally are in relation to Derek's employment. As a result, even though Sally acquires the rights from an employee share scheme, Derek will need to include the discount related to these rights in his assessable income for the 2008 income year.

Shares or rights acquired by your associate will not be qualifying shares or rights. Refer to question 8 for more information.

6. What happens if I never exercise rights that I acquire from an employee share scheme?

If you acquire rights from an employee share scheme, 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
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.

Example 4 - rights lapsing

Following on from example 1, Saskia, an employee of Delco Corporate, acquires 10,000 rights to acquire shares in Delco on 16 May 2005 for nil consideration. One of the conditions of the share scheme requires Saskia to forfeit ownership of the rights if Delco's share price does not reach $2 per share within three years of Saskia acquiring the right.

Saskia's rights do not satisfy the conditions to be qualifying rights. This means that Saskia must include the discount in her assessable income upfront, in the income year she acquires the shares. As a result, Saskia includes the discount on the rights when she lodges her tax return for the 2005 income year.

On 16 May 2008, three years after Saskia acquired the rights, Delco's share price has not reached $2 per share. As per the share scheme conditions, Saskia forfeits ownership of the rights.

Because Saskia has lost the rights without having exercised them and, at the time the rights were originally acquired, Saskia was employed by the company in which she had a right to acquire a share, Saskia satisfies the requirements to be treated as never having acquired the rights.

Accordingly, Saskia requests an amendment to remove the discount from her assessable income for the 2005 year. Even though the request is outside the normal two year time limit for amending prior year assessments, the time limit does not apply to the removal of the discount.

Example 5 - alienated rights lapsing

Following on from example 4, if, instead of acquiring the rights, Saskia had allocated the rights to her spouse, Jason, Saskia would still be required to include the discount related to the rights in her assessable income for the 2005 income year.

However, if Jason forfeits ownership of the rights three years later because Delco's share price does not reach $2, Saskia will not be able to amend her 2005 assessment to remove the discount related to the rights. This is because Jason does not satisfy the requirements to treat the right as never having been acquired, as he was not an employed by Delco at the time he acquired the rights.

Questions about qualifying shares or rights

7. What is a qualifying share or qualifying right?

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

the share is acquired by you from an employee share scheme
the company is your employer or your employer's holding company
the shares or rights to shares available from the employee share scheme 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, and
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 employee share scheme of your employer or its holding company.

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

8. Can shares or rights that my associate acquires under an employee share scheme be qualifying shares or rights?

No. 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 person's 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 you acquire the shares or rights.

Example 6 - rights acquired in relation to associate's employment

Following on from example 3, Sally acquires 700 rights in relation to her spouse, Derek's employment. These rights are not qualifying rights as Sally is not an employee of D2D Finance Company. As a result, Derek includes the discount on the 700 rights in the income year that Sally acquires the rights, which is the 2008 income year.

9. What are the two concessions that may be 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.

Questions about making an election to be assessed on the discount upfront

10. How do I make an election to have qualifying shares or rights assessed in the year I 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 the income year in which you acquired the shares or rights. If you make an election, the election will apply to all qualifying shares or rights you acquired in the 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.

For 2007-08 and previous income years, you have to make an election in writing, in the approved form as set out in Taxation Determination TD 97/23 if you want to have the discount on your qualifying shares or rights assessed upfront. The election has to be made before you lodge your tax return for the income year in which the shares or rights are acquired.

Once made, you cannot revoke an election to instead be assessed on the discount at cessation time. However, in relation to rights, you may be able to remove the discount from your assessment if you later lose the rights. Refer to question 6 for more information.

11. Can I still have the discount assessed in the year I acquire qualifying shares or rights if I don't make an election?

The Commissioner has a 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 Commissioner to consider allowing you to make a late election, you must make a request in the approved form.

12. What are the requirements for the first $1,000 of the discount to be exempt from tax?

The $1,000 exemption only applies if you have elected to be assessed on the discount of qualifying shares or rights upfront and if the employee share scheme, 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 employee share scheme operated on a non-discriminatory basis (including the provision of financial assistance in respect of the acquisition of shares or rights), which means that

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.

13. Do I need to make an election if my discount is less than $1,000 and the employee share scheme meets the exemption conditions?

No. For 2008-09, you are deemed to have made an election if your qualifying shares or rights are from an employee share scheme 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. Refer to example 7.

If, however, 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.

14. How do I calculate the discount on my shares or rights when I 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 employee share scheme from which the shares or rights are acquired meets the exemption conditions, the total discount is also reduced by $1,000.

Example 7 - calculating the discount on qualifying shares assessed upfront

Peter acquires 1,000 qualifying shares for free from his employer, ABC Bank, on 30 August 2008 at a market value of $1 per share. ABC Bank's employee share scheme satisfies the exemption conditions.

Peter's calculates the discount as:

market value on acquisition of the shares 1,000 shares $1	$1,000
Less
consideration paid to acquire shares	Nil
discount equals	$1,000
Less
reduction amount	$1,000
discount included in assessable income	Nil

Because the total discount of the qualifying shares is $1,000 or less and the exemption conditions have been satisfied, Peter is deemed to have made an election to assess the discount upfront, in the year he acquired the shares, the 2009 income year. As the $1,000 exemption has reduced the discount to nil, he does not need to include the discount in his assessable income.

Refer to example 14 to see the CGT implications when Peter sells his shares.

Example 8 - calculating the discount on qualifying rights assessed upfront

Shaun acquires 500 qualifying rights for free from his employer, United Power, on 10 September 2008, at a market value of $1 per right. The employee share scheme does not satisfy the exemption conditions.

On 16 October 2008, Shaun begins work with a new unrelated employer, Energy Online, and acquires 500 qualifying rights for free, at a market value of $2 per right. The employee share scheme satisfies the exemption conditions so that the first 1,000 of the discount is not assessable.

When Shaun lodges his tax return for the 2009 year, he makes an election to assess the discount on all qualifying shares and rights upfront.

Shaun calculates his discount as:

market value of United Power rights at acquisition date (500 rights $1)	$500
Less
consideration paid to acquire the rights	Nil
	$500
market value of Energy Online rights at acquisition date (500 rights x $2)	$1,000
less consideration paid to acquire the rights	Nil
total discount	$1,500

less reduction amount for Energy Online rights discount amount included in assessable income	$1,000 $500

Shaun includes the discount of $500 in his assessable income for the 2009 year.

Refer to example 15 to see the CGT implications when Shaun disposes of his rights.

Example 8 - calculating the discount on qualifying rights assessed upfront

When Shaun lodges his tax return for the 2009 year, he makes an election to assess the discount on all qualifying shares and rights upfront.

Shaun calculates his discount as:

market value of United Power rights at acquisition date (500 rights $1)	$500
Less
consideration paid to acquire the rights	Nil
	$500
market value of Energy Online rights at acquisition date (500 rights x $2)	$1,000
less consideration paid to acquire the rights	Nil
total discount	$1,500

less reduction amount for Energy Online rights discount amount included in assessable income	$1,000 $500

Shaun includes the discount of $500 in his assessable income for the 2009 year.

Refer to example 15 to see the CGT implications when Shaun disposes of his rights.

15. If I do not make an election, when do I need to include the discount in my assessable income?

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.

Questions about assessing the discount at cessation time

16. What is a cessation time?

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

Cessation time - 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
ten years from the date you acquired the shares.

Cessation time - 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.

16a. When is my cessation time if I can only dispose of my shares and rights during particular trading windows?

Disposal restrictions are restrictions imposed by the employer or administrator of the employee share scheme, that prevent the employee from disposing of shares for a certain period of time. See ATO ID 2008/121 for information about voluntary undertakings not to dispose of shares.

As explained in the answer to question 16, the time when any disposal restrictions cease to have effect may be relevant to determining your cessation time.

Disposal restrictions will cease to have effect on the first date on which you are 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 are able to dispose of the shares.

Example 9a - determining the cessation time for rights with disposal restrictions and trading windows

Giles acquires 1,000 rights from his employer Fine Fashion Limited, on 29 October 2006, under an employee share scheme. The rights can be exercised in one years time and expire after three years. The employee share scheme restricts disposal of the shares resulting from the exercise of the rights for two years after exercise. However, the scheme also provides two trading windows during the restriction period; one on 29 October 2007 and one on 29 October 2008. On those dates, the restrictions are lifted for a period of five working days.

Giles exercises the rights on 5 May 2008. As he is prevented from disposing of the shares, the cessation time happens on 29 October 2008 provided he is still employed until this time. That is, the disposal restrictions cease to have effect on the first date on which Giles is able to dispose of the shares.

Example 9b - determining the cessation time for shares or rights where Board approval to trade is required

Lisa acquires share from her employer Xyco Limited, on 29 October 2006, under an employee share scheme. The employee share scheme restricts disposal of the shares for a period of three years. However, the scheme also provides three trading windows during the three year restriction period which commence on 30 March 2007, 30 March 2008 and 30 March 2009 for a period of five days. In accordance with the employer's policy on insider trading, certain employees must request the Xyco Limited Board's approval to dispose of their shares during the trading windows by submitting a request and stating that at the time they do not believe they are in possession of material non-public information.

On 30 March 2007, the first trading window opens. Lisa is an employee covered by the insider trading policy, however, she is not in possession of material non-public information at the time of the trading window. Lisa chooses to keep her shares and does not request approval to dispose of them. As Lisa is still employed, the cessation time for Lisa's shares will be 30 March 2007, that is, the first date on which she could have disposed of her shares by requesting approval, even though she chose not to do so. If Lisa was in possession of material non-public information at the time of the trading window, she would still be subject to disposal restrictions until the first time she is able to dispose of her shares.

17. How do I calculate 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 less 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 less 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.

Example 10 - calculating the discount on qualifying shares disposed of within 30 days

Joe acquires 1,000 qualifying shares for free from his employer, ABC Bank, on 30 August 2006 at a market value of $1 per share. The shares are subject to disposal restrictions. Joe does not make an election to assess the discount upfront.

On 15 September 2007, Joe ceases employment with ABC Bank and the disposal restrictions on the shares are lifted. Joe sells the shares at arm's length on 20 September 2007 for $5 per share.

Joe has a cessation time on 15 September 2007, the date he ceases employment. As Joe sells his shares five days later at arm's length, Joe calculates the discount using the consideration he receives when disposing of his shares:

consideration received for disposal of the shares (1,000 shares $5)	$5,000
less
consideration paid to acquire shares	Nil
discount equals	$5,000

Joe includes the discount in his assessable income for the year in which the cessation time occurred, the 2008 income year.

Refer to example 16 to see the CGT implications for Joe upon the disposal of the shares.

Example 11 - calculating the discount on qualifying rights not disposed of within 30 days

Margaret acquires 500 qualifying rights for free from her employer, Seekco Mining, on 10 October 2007, at a market value of $1 per right. Margaret does not make an election to assess the discount on the rights upfront.

Margaret exercises the rights on 1 May 2008. She pays an exercise price of $2 per right to acquire 500 shares at a market value of $17 per share. The shares have no restrictions on their disposal. Margaret sells the shares on 13 June 2008 for $18 per share, incurring a brokerage fee of $50 on the sale of the shares.

Margaret has a cessation time of 1 May 2008, on the date she exercises the rights. As Margaret does not sell the shares she acquires from exercising the rights within 30 days of the cessation time, she calculates the discount using the market value of the shares she acquired at cessation time:

market value of the shares at cessation time 500 shares $17		$8,500
Less
consideration paid to acquire rights	Nil
consideration paid to exercise the rights 500 rights $2	$1,000	$1,000
discount equals		$7,500

Margaret includes the discount of $7,500 in her assessable income for the year in which cessation time occurs, the 2008 income year.

Refer to example 17 to see the CGT implications for Margaret when she sells her shares.

18. Can I deduct 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. Refer to example 17.

Questions about disposing of shares or rights acquired from an employee share scheme

For ESS interests that were 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 section contains information about the CGT rules that apply to ESS interests with a cessation time prior to 1 July 2009.

19. Are there CGT implications when I dispose of shares or rights acquired from an employee share scheme?

Yes. Subdivision 130-D of the Income Tax Assessment Act 1997 contains special rules for employee share schemes 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 employee share scheme, the capital gain or loss will need to be calculated in accordance with the rules applicable to that event. The CGT implications, however, 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.

20. Are there CGT implications when I exercise 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 example 15.

21. Am I entitled to the 50% discount for capital gains on shares or rights I have owned for 12 months or longer?

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

22. Do I have any CGT implications when I allocate my shares or rights to an associate?

If you negotiate for shares or rights from an employee share scheme (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 question 5, 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 as you have disposed of the shares or rights by providing them to your associate.

Example 12 - CGT implications when rights acquired by associate

Following on from example 6, Sally acquires 700 rights for nil consideration from D2D Finance Company in the 2008 income year. The rights are provided in relation to her spouse Derek's employment with D2D Finance Company. Derek includes the discount related to the rights in his assessable income for the 2008 income year. As Derek did not acquire the rights before allocating them to Sally, he does not have any CGT implications.

When Sally disposes of the rights to acquire shares in D2D Finance Company or when she sells the underlying shares (that she acquires from exercising the rights), she will need to calculate the CGT gain or loss in accordance with the rules applicable to the CGT event that occurs.

23. What are the CGT implications when I dispose of shares or rights on which I was assessed on the discount 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.

Example 13 - CGT implications for non-qualifying shares

Following on from example 2, Eliza sells her 800 shares on 10 November 2008 for $3 per share, incurring a $50 brokerage fee on the sale. A CGT event A1 (disposal of CGT asset) happens on the sale of Eliza's shares.

Eliza works out the cost base of her shares by including their market value on acquisition, $2,000 (800 shares $2.50), and the $50 brokerage fee.

Eliza's capital gain is:

Capital proceeds: 800 shares $3		$2,400
less cost base:
market value of the shares 800 shares $2.50 brokerage fee	$2,000 $50	$2,050
Capital gain equals		$350

Eliza includes the capital gain of $350 in her assessable income in the year the CGT event A1 happened, which is the 2009 income year. Eliza cannot use the 50% discount method to calculate her net capital gain as she did not own the shares for at least 12 months.

Example 14 - CGT implications for qualifying shares that are assessed upfront

Following on from example 7, Peter sells his shares on 5 September 2008 for $5 per share, incurring a $50 brokerage fee on the sale. A CGT event A1 (disposal of CGT asset) happens on the sale of Peter's shares.

Peter works out the cost base of the shares by including their market value on acquisition, $1,000 (1,000 shares $1), and the $50 brokerage fee.

Peter's capital gain is:

capital proceeds 1,000 shares $5		$5,000
less cost base
market value of the shares 1,000 shares $1 brokerage fee	$1,000 $50	$1,050
capital gain equals		$3,950

Peter includes the capital gain of $3,950 in his assessable income in the year the CGT event A1 happened, which is the 2009 year. Peter cannot use the 50% discount method to calculate his net capital gain as he did not own the shares for more than 12 months.

Example 15 - CGT implications for rights that are assessed upfront and on the disposal of the underlying shares

Following on from example 8, Shaun exercises his rights from United Power on 12 March 2009 and pays an exercise price of $2 per share to acquire 500 shares.

A CGT event C2 (cancellation, surrender or similar ending) happens on the exercise of the United Power rights. However, under the CGT rules, the capital gain or capital loss is disregarded.

On the same day, Shaun sells the United Power shares he acquired via the exercise of rights for $4 per share, incurring a $50 brokerage fee on the sale. A CGT event A1 (disposal of a CGT asset) happens when the shares are sold.

Shaun works out the cost base of the shares acquired as a result of exercising the rights by including the market value of the rights on acquisition, $500 (500 rights $1), the exercise price paid, $1,000 (500 rights $2) and the $50 brokerage fee.

Shaun's capital gain is:

capital proceeds 500 shares $4		$2,000
less cost base
market value of the rights 500 rights $1 exercise price of the rights 500 rights $2 brokerage fee	$500 $1,000 $50	$1,550
capital gain equals		$450

Shaun includes the capital gain of $450 in his assessable income for the 2009 year. Shaun cannot use the 50% discount method to calculate his net capital gain as he did not own the shares for at least 12 months.

24. What are the CGT implications when I dispose of shares or rights on which I was assessed on the discount 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.

For ESS interests acquired prior to 1 July 2009 for which a cessation time did not occur prior to 1 July 2009; if the ESS interests are disposed of within 30 days after the deferred taxing point, the deferred taxing point for the ESS interests becomes the time when the employee disposes of the interests.

Example 16 - CGT implications for qualifying shares disposed within 30 days of cessation time

Following on from example 10, Joe sells his shares on 20 September 2007, five days after he has a cessation time. He receives $5 per share and incurs a brokerage fee of $50 on the sale.

When Joe sells his shares, a CGT event A1 (disposal of CGT asset) happens. However, the capital gain or capital loss from the CGT event is disregarded as the sale of the shares happened within 30 days of the cessation time.

Example 17 - CGT implications for qualifying rights and underlying shares not disposed of within 30 days of cessation time

Following on from example 11, Margaret exercises 500 rights on 1 May 2008. She pays an exercise price of $2 per right to acquire 500 shares at a market value of $17 per share. The shares have no restrictions on their disposal.

When Margaret exercises her rights, a CGT event C2 (cancellation, surrender or similar ending) happens on the exercise of the rights. However, under the CGT rules, the capital gain or capital loss is disregarded.

Margaret sells the shares she acquires on 13 June 2008 for $18 per share, incurring a brokerage fee of $50 on the sale of the shares. A CGT event A1 (disposal of CGT asset) happens when Margaret sells her shares.

As Margaret did not dispose of the shares she acquired through the exercise of the rights within 30 days of the cessation time, she will need to calculate her CGT gain or loss.

Margaret calculates her cost base for the shares by including their market value on the date she acquired them (which is the cessation time of the rights, being the day the rights are exercised). The market value at cessation time is $8,500 (500 shares x $17). The cost base also includes the brokerage fee of $50.

Margaret's capital gain is:

capital proceeds 500 shares $18		$9,000
Less
cost base market value of the shares 500 shares $17	$8,500
brokerage fee	$50	$8,550
capital gain equals		$450

Margaret includes the capital gain in her assessable income in the year the CGT event A1 happened, the 2008 income year. Margaret cannot use the 50% CGT discount to calculate her net capital gain as she did not own the shares for at least 12 months.

Questions about stapled securities and rights to acquire stapled securities

25. What are stapled securities?

Stapled securities are created when two or more different securities are contractually bound together so that 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.

26. What are the tax implications of acquiring stapled securities, or rights to acquire stapled securities, from an employee share scheme?

If you acquire stapled securities, or rights to acquire stapled securities, the employee share scheme 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 employee share schemes. This means that you may be entitled to use the tax concessions available under Division 13A. Refer to question 9 for more information about the concessions.

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 in questions 27 and 28.

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.

Example 18 - non-qualifying stapled securities acquired from an employee share scheme

Ramon acquires 300 stapled securities for free from his employer ABC Co. Each stapled security consists of ordinary shares in ABC Co and units in the ABC Unit Trust. The stapled securities do not meet the qualifying conditions in Division 13A as Ramon holds more than 5% of the ordinary shares in ABC Co.

Because the stapled securities do not meet the qualifying conditions, Division 13A will not apply to the stapled securities as a whole. Instead, Division 13A will only assess the discount received on the ordinary share component of the stapled securities. The units in the unit trust will be assessable under other provisions of the income tax law.

27. What is a qualifying stapled security or a qualifying right to acquire a stapled security?

The qualifying conditions that apply to shares or rights acquired from an employee share scheme also apply to stapled securities and rights to acquire stapled securities. Refer to question 7 for a list of these conditions.

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 employee share scheme 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.

Example 19 - modifications to qualifying conditions

Megan, an employee of Apco Limited, acquires 1,000 stapled securities for free in relation to her employment. Each stapled security comprises an ordinary share in Apco Limited and a unit in the Apco Trust.

80% of Apco Limited's permanent employees have been entitled to participate in an employee share scheme run by the company. In contrast, only 40% of the permanent employees of the trustee of the Apco Trust have been entitled to participate in an employee share scheme.

As an employee of Apco Limited, Megan will satisfy the requirement that at least 75% of employees of her employer were entitled to participate in an employee share scheme.

However, if Megan were an employee of the trustee of the Apco Trust, her stapled securities would not be qualifying as less than 75% of the trustee's employees have been entitled to participate in an employee share scheme.

28. What is a cessation time for stapled securities or rights to acquire stapled securities?

The events that trigger a cessation time for qualifying shares and rights also apply to stapled securities and rights to acquire stapled securities. Refer to question 16 for a list of the events that can trigger a 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.

29. What are the CGT implications when I dispose of stapled securities or rights to acquire stapled securities that I acquired from an employee share scheme?

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. Refer to Questions about disposing of shares or rights for more information.

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. Refer to our fact sheet Stapled securities and capital gains tax for more information.

Summary

Have you acquired shares or rights from an employee share scheme? See question 1.

Yes	Read on.
No	Not assessed by Division 13A. See question 2.

Have you allocated the shares or rights to an associate? See question 5.

Yes	You must include the discount in your assessable income in the year you acquire the shares or rights. See question 8.
No	Read on.

Are the shares or rights qualifying shares or qualifying rights? See question 7.

Yes	Read on.
No	You must include the discount in your assessable income in the year you acquire the shares or rights. See question 4.

Did you make an election to assess the shares or rights upfront? See question 10.

Yes

You must include the discount in your assessable income in the year you acquire the shares or rights. See question 14.

If the exemption conditions are met, you can reduce the discount you include in your assessable income by up to $1,000. See question 12.

CGT may apply when you dispose of the shares or rights. See question 23.

You must include the discount in your assessable income in the year the cessation time occurs. See question 17. Read on.

Did you have a CGT event within 30 days of the cessation time? See question 24.

Yes	Depending on the CGT event, any capital gain or loss may be disregarded.
No	CGT may apply.

Find out more

Guide to capital gains tax Employee share schemes - record keeping Foreign income exemption for Australian residents and temporary residents - employee share schemes

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