FocusOn - Employee Share Acquisition Scheme

Receiving shares or options from your employer may have significant tax consequences. If you pay less than market value for the share or option, the discount is included in your tax return as assessable income. The amount of this discount and when it is assessed depends on various factors, as discussed below.

Application of the rules

The rules apply if you obtain a share or option as a result of your employment. There need not be a formal scheme in place. However, if you pay market value consideration to acquire the share or option, the provisions do not apply.

If an associate such as your spouse receives shares or options as a result of your employment, the income is still assessed to you.

Qualifying shares & options

Special tax concessions may be available for a ‘qualifying’ share or option. To be qualifying it must pass the following tests:

	The share or option is in a company that is your employer or its holding company
	All of the shares available under the scheme are ordinary shares or options for ordinary shares, and
	Immediately after the acquisition of the share or option, you own no more than 5% of the company and control no more than 5% of the votes.
	If you acquire shares you must also pass the following additional test:
	At least 75% of the permanent employees of the employer are entitled to acquire shares or options under this scheme or a related scheme.

Your employer can usually advise you if you are receiving qualifying shares or options. If it is a foreign scheme, you may need to make your own determination.

When is the discount calculated

For a non-qualifying share or option, the discount is assessed in the year in which you are allocated the share or option. Similarly, if you receive a qualifying share that is not subject to disposal restrictions and cannot be forfeited, the discount is taxed in the year the share is allocated.
However, if it is a qualifying share or option subject to restrictions, you will be taxed on the assessable discount at the ‘cessation time’ unless you elect to be taxed upfront.

For a share, the cessation time is the earliest of:

	When the share is sold
	When the restrictions cease
	When your employment ceases, or
	10 years from the date of issue.

For an option, the cessation time is the earliest of:

	When the option is sold
	When your employment ceases
	If the option is exercised and the resulting share has restrictions, when the restrictions cease
	If the option is exercised and there are no restrictions, when the option is exercised, or
	10 years from the date of issue.

If you wish to be taxed upfront, you will need to make an election in writing in a form approved by the Commissioner.

Calculation of the Assessable Discount

Assessable Discount:
Market value – acquisition price of share or option

Shares
The market value of the share is the market value at the time the discount is calculated, being either the date of acquisition or the cessation time. If the share is acquired as the result of exercising an option, the acquisition price will be the sum of the amount paid to acquire the option and the exercise price.

Options
If the options are traded on a stock exchange, you use the listed market value. Otherwise, the value is determined by formulae contained in the Tax Act. These formulae are based on the market value of the share and the maximum number of years available to exercise the option.

If your employer is unable to advise you of the market value of the option, Saward Dawson can perform the calculation for you.

Sale within 30 Days
If you choose to be taxed at the cessation time and you sell the share or option within 30 days of that date, you use actual proceeds of sale rather than market value in calculating the assessable discount.

Exemption for first $1,000
If you receive a qualifying share or option, you can choose to treat the first $1,000 of the assessable discount as exempt provided the following conditions are satisfied:

	Your share or option cannot be forfeited
	You cannot sell your share or option within the earlier of 3 years and when you cease employment, and
	Any financial assistance provided to employees to participate in the scheme is on a non-discriminatory basis.

If you choose to take the $1,000 exemption, any remaining discount on all remaining shares and options are assessable in the year of acquisition. You cannot defer the taxing point until cessation.

Tax Liability on Discount

The full amount of the assessable discount is subject to tax. It will therefore be included as part of your taxable income and will be taxed at marginal rates.

Capital Gains Tax

A share or option can be subject to the employee share scheme rules once only. Once you have been taxed on an assessable discount, any subsequent gain in the value of the share or option will be taxed at the time of sale under the Capital Gains Tax (CGT) rules.

Provided you have held the asset for at least 12 months, only 50% of the capital gain is taxable. Note that if you exercise an option and immediately sell the share, you are not entitled to the 50% CGT concession as you have not held the share for at least 12 months.

Due to the differing treatment for discounts and capital gains, you may choose to be taxed at the date of acquisition if you believe the value of your share or option will increase significantly over time (see the following example).

Example
The market value of the share at acquisition is $10. You paid nothing for the share. At the cessation time in 3 years, you estimate the market value will be $50 and you will sell that share at that time.

If you choose to be assessed on the discount at acquisition, the tax is as follows:

If you choose to be assessed at the cessation time, the tax is as follows:

If you receive qualifying shares, you will need to consider your expectations of the share price and your cash flow requirements before making an election on whether to defer taxing the assessable discount until the ‘cessation time’.

The employee share scheme rules are complicated and can significantly impact on your tax position. It is vital that you provide us with details of any shares or options acquired or sold when submitting your income tax information so that we can assist you in determining the most tax effective position.

Published : 6 July 2007