Employee Share Scheme - Share Appreciation Rights - no right to acquire a share

Is the discount given on a Share Appreciation Right acquired by the taxpayer under an employee share scheme, included in the taxpayer's assessable income under section 139B of the Income Tax Assessment Act 1936 (ITAA 1936)?

No. The discount given on a Share Appreciation Right is not included in the taxpayer's assessable income under section 139B of the ITAA 1936 as it is not a right to acquire a share.

The taxpayer was granted Share Appreciation Rights (herein referred to as SARs), by their employer under an employee share plan.

The taxpayer paid no consideration to acquire the SARs.

The SARs entitled the taxpayer to receive a cash sum equal to the difference between the market value of the underlying shares in the employer company and the exercise price if they were exercised prior to their expiry date.

As a result of a takeover of the taxpayer's employer company, the employer settled the entitlements of the taxpayer under the SARs by paying the taxpayer the agreed takeover price less the exercise price and taxes.

In order to determine if the discount given on the SARs is included in the taxpayer's assessable income under section 139B of the ITAA 1936 it must be established if they were acquired under an employee share scheme.

A taxpayer acquires shares or rights to shares under an employee share scheme if they were acquired in respect of, or in relation directly or indirectly to any employment of the taxpayer (subsection 139C(1) of the ITAA 1936) and if any consideration for the acquisition is less than their market value at the time of acquisition (section 139C(3) of the ITAA 1936).

The SARs were not for the acquisition of shares but rather, when exercised, resulted in a cash equivalent of the shares being paid to the taxpayer. Accordingly, they are not acquired under an employee share scheme as defined in section 139C of the ITAA 1936. The discount given on the SARs is not included in the taxpayer's assessable income under section 139B of the ITAA 1936 as they are not rights to acquire shares.