Employee Share Scheme: issue of rights or shares because of the employment of an associate of the acquirer

Does the employee taxpayer, who is an associate of the acquirer, include in assessable income under subsection 139D(2) of the Income Tax Assessment Act 1936 (ITAA 1936) the discount given on rights or shares issued to an acquirer under an employee share scheme in the income year they were acquired?

Yes. The employee taxpayer includes in assessable income under subsection 139D(2) of the ITAA 1936 the discount given on rights or shares issued to an acquirer under an employee share scheme in the income year they were acquired.

The taxpayer is an employee of Company A Ltd.

Company A Ltd operates an employee share scheme that entitles the taxpayer or a nominated relative to be issued with rights or shares in the company. The taxpayer nominated the acquirer to receive the rights or shares. The taxpayer is an associate of the acquirer, being a natural person, partnership, company or trust under subsection 26AAB(14) and section 139GE of the ITAA 1936.

Company A Ltd issued rights or shares to the acquirer under this employee share scheme at less than their market value.

Division 13A of the ITAA 1936 provides for the taxation treatment of rights or shares under employee share schemes by including any discount from the market price of the rights or shares in the taxpayer's assessable income.

The acquirer acquires rights or shares under an employee share scheme if they were acquired in respect of, or in relation directly or indirectly to any employment of an associate of the acquirer under subsection 139C(1) of the ITAA 1936.

As the taxpayer is an associate of the acquirer, the rights or shares were acquired by the acquirer under an employee share scheme.

These rights or shares are not qualifying rights or shares because the acquirer is not an employee of Company A Ltd under subsection 139CD(3) of the ITAA 1936.

But for section 139D of the ITAA 1936, the discount would be included in the assessable income of the acquirer in the income year that Company A Ltd issued the rights or shares to the acquirer under subsection 139B(2) of the ITAA 1936.

However, as the rights or shares were acquired by the acquirer because of the employment of the taxpayer who is an associate of the acquirer, the discount on the rights or shares is included in the taxpayer's assessable income rather than the acquirer's assessable income under subsection 139D(2) of the ITAA 1936.

For capital gains purposes, the rights or shares are acquired by the acquirer at their market value (calculated under Subdivision F of Division 13A of the ITAA 1936) on the day they were issued by Company A Ltd under section 130-85 of the Income Tax Assessment Act 1997 (ITAA 1997).