Employee share scheme: ordinary share requirement for 'qualifying shares'

Are shares granted to the taxpayer under an employee share scheme 'qualifying shares' in terms of section 139CD of the Income Tax Assessment Act 1936 (ITAA 1936)?

No. The shares available for acquisition under the employee share scheme have no voting rights and thus are not ordinary shares for the purposes of subsection 139CD(4) of the ITAA 1936. Therefore, the shares granted to the taxpayer under the scheme are not 'qualifying shares' in terms of section 139CD of the ITAA 1936 .

The taxpayer is an employee of a company.

The taxpayer is granted shares under an employee share scheme of the employer company.

The shares are issued at a discount.

The shares do not have voting rights.

Division 13A of the ITAA 1936 provides for the taxation treatment of certain employee share scheme shares and rights acquired after 6 pm in the Australian Capital Territory on 28 March 1995, subject to certain application and transitional provisions.

The taxpayer acquires shares under an employee share scheme that falls within the Division as the shares are acquired in respect of, or for or in relation directly or indirectly to, the employment of the taxpayer, the consideration for the acquisition is less than their market value at the time of acquisition, and the acquisition is not the result of exercising employee share scheme rights that the taxpayers acquired (subsections 139C(1), 139C(3) and 139C(4) of the ITAA 1936).

The taxing point for the discount given on the shares acquired by the taxpayer depends on whether the shares are 'qualifying shares', and if the taxpayer has made an election under section 139E of the ITAA 1936.

For a share to be a 'qualifying share', six conditions in section 139CD of the ITAA 1936 must be satisfied. One of these conditions is that all the shares available for acquisition under an employee share scheme are 'ordinary shares'.

Division 13A of the ITAA 1936 was enacted as a replacement for section 26AAC of the ITAA 1936 and it is considered that the policy intent is the same in respect of both regimes. In relation to the 'ordinary share' requirement in paragraph 26AAC(4A)(d) of the ITAA 1936, the explanatory memorandum to the Taxation Laws Amendment Bill (No.5) 1988 (which introduced subsections 26AAC(4A) to 26AAC(4F)) stated that: ...all the shares, including shares that may be acquired under a right, are ordinary shares - this requirement will ensure that the shares offered under a scheme are not disadvantaged in respect of voting rights in comparison with similar shares offered by the employer companies (subparagraphs 4(A)(d)(ii) and (iii).

The views set out by the Commissioner in Taxation Ruling IT 2516, (at paragraph 4), to the effect that the relevant shares have the same voting rights as ordinary shares of the company, and in paragraph 21 of Taxation Ruling IT 2609, with respect to section 26AAC of the ITAA 1936 are equally applicable to Division 13A of the ITAA 1936.

The shares available for acquisition under the employee share scheme of the employer company therefore are not ordinary shares for the purposes of subsection 139CD(4) of the ITAA 1936, as the shares do not have voting rights. Therefore, the shares granted to the taxpayer under the scheme are not 'qualifying shares' in terms of section 139CD of the ITAA 1936.