Issue
Is the discount that a taxpayer receives on a qualifying right acquired under an employee share scheme, in relation to their employment, included in their instalment income if they make an election under subsection 139E(1) of the Income Tax Assessment Act 1936 (ITAA 1936)?
Decision
Yes. The discount that a taxpayer receives on a qualifying right acquired under an employee share scheme, in relation to their employment, is included in their instalment income if they make an election under subsection 139E(1) of the ITAA 1936.
Facts
The taxpayer is an employee who is granted rights to acquire shares at a discount under an employee share acquisition scheme. The rights are qualifying rights for the purposes of Division 13A of the ITAA 1936 and they have an expiration date a number of years after the date the rights were granted.
The taxpayer has made an election under subsection 139E(1) of the ITAA 1936 to include the discount on the qualifying rights in their assessable income in the year in which the rights were acquired.
Reasons for Decision
Subsection 45-120(1) of Schedule 1 to the Taxation Administration Act 1953 (TAA) provides that your instalment income for a period includes your ordinary income derived during that period, but only to the extent that it is assessable income of the income year that is or includes that period. 'Ordinary income' has the meaning given by section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997), that is, income according to ordinary concepts.
The expression 'income according to ordinary concepts' is not defined in the legislation however its meaning has been judicially considered and it has been held that in order for a benefit to be income according to ordinary concepts there is a requirement that it must be money or something capable of being turned into money. This principle, which was originally expressed in Tennant v. Smith [1892] AC 150, was affirmed in FC of T v. Cooke and Sherden 80 ATC 4140; (1980) 10 ATR 696 and in Payne v. Federal Commissioner of Taxation (1996) 66 FCR 299; 96 ATC 4407; (1996) 32 ATR 516.
Remuneration for personal services has always been considered to be income according to ordinary concepts ( Hayes v. Federal Commissioner of Taxation (1956) 96 CLR 47; (1956) 6 AITR 248; (1956) 11 ATD 68, Scott v. Federal Commissioner of Taxation (1966) 117 CLR 514; (1966) 14 ATD 286; (1966) 10 AITR 367). Therefore, unless the income is deferred under Division 13A of the ITAA 1936, the rights are considered ordinary income of the employee in the year in which the rights are acquired.
Abbott v. Philbin [1961] AC 352 is authority for the proposition that an option granted by an employer to an employee is able to be turned to pecuniary account and is therefore assessable income to the employee during the year of income in which the option was granted. This decision was considered in Donaldson v. Federal Commissioner of Taxation [1974] 1 NSWLR 627; (1974) 74 ATC 4192; (1974) 4 ATR 530, where Bowen C.J. observed that it is not unusual for companies to give to senior employees rights of varying kinds to take up shares upon terms which are beneficial to the employee and that it was fair to say that such benefits are regarded as being in the nature of a bonus or an addition to salary and are of an income nature.
The discount is income according to ordinary concepts and is therefore ordinary income, not statutory income.
Section 10-5 of the ITAA 1997, which lists provisions about assessable income, does not affect the character of the income. The provisions listed either: • include in assessable income amounts that are not ordinary income; or • vary or replace the rules that would otherwise apply for certain kinds of ordinary income.
Although the provisions of Division 13A of the ITAA 1936 are listed under 'shares' in section 10-5 of the ITAA 1997, this does not mean that the discount is statutory income.
Subsection 6-10(2) of the ITAA 1997 makes it clear that amounts are only statutory income if they are not ordinary income, but are included in an entity's assessable income by a provision about assessable income. The note to subsection 6-10(2) makes it clear that many of the provisions listed in section 10-5 of the ITAA 1997 contain rules about ordinary income and that the rules do not change the character of the income as ordinary income.