Employee share scheme: capital gains tax - cost base modification of share acquired from exercise of qualifying right

Is the first element of the cost base or reduced cost base of a share calculated under subsection 130-83(3) of the Income Tax Assessment Act 1997 (ITAA 1997) when the taxpayer acquired the share from the exercise of a qualifying right granted under an employee share scheme, and the share was not disposed of within 30 days after the cessation time?

Yes. The cost base modification rules in subsection 130-83(3) of the ITAA 1997 apply to a share acquired from the exercise of a qualifying right granted under an employee share scheme, when the share is not disposed of within 30 days after the cessation time.

The taxpayer, an employee, was granted a right to acquire a share under an employee share scheme.

The right was granted free of cost to the taxpayer. However, there is a price payable upon exercise of the right.

The right meets the conditions as a qualifying right under section 139CD of the Income Tax Assessment Act 1936 (ITAA 1936).

The taxpayer exercised the right and acquired a share and the share was withdrawn from the scheme (constituting a cessation time under section 139CB of the ITAA 1936).

The taxpayer subsequently disposed of the share more than 30 days after the cessation time.

The right granted to the taxpayer under the employee share scheme is an option for the purposes of capital gains tax (CGT). Division 134 of the ITAA 1997 explains how to calculate the cost base or reduced cost base of an asset acquired from the exercise of an option.

Item 1 in the table in subsection 134-1(1) of the ITAA 1997 (Item 1) would usually apply to set the first element of the cost base or reduced cost base of the asset to be what the grantee paid for the option, plus any amount paid to exercise the option.

However, Note 3 to subsection 134-1(1) of the ITAA 1997 states that Item 1 is modified by subdivision 130-D of the ITAA 1997, for shares or rights acquired at a discount within the meaning of Division 13A of the ITAA 1936.

Under subsection 130-83(3) of the ITAA 1997, the first element of the cost base or reduced cost base of the share acquired by exercising the qualifying right, is its market value at cessation time worked out under sections 139FA to 139FF of the ITAA 1936.

Subsection 130-83(3) of the ITAA 1997 relevantly applies when CGT event A1, C2, E1, E2 or E5 does not happen to shares acquired by the exercise of the qualifying rights at cessation time, or within 30 days after the cessation time.

Accordingly, the modifications to the cost base of the shares under subsection 130-83(3) of the ITAA 1997 apply to the shares acquired by the taxpayer's exercise of the qualifying rights granted under the employee share scheme, and the cost base of the shares acquired by exercising the qualifying right is calculated under subsection 130-83(3) of the ITAA 1997, rather than subsection 134-1(1) of that Act.