Issue
Where an employee acquires a share in a company from the trustee of an employee share trust, and as consideration for that share pays an amount to the company as a contribution to share capital, is that payment taken into account in calculating, for the purposes of subsection 130-90(4) of the Income Tax Assessment Act 1997 (ITAA 1997), the amount for which the employee acquired the share?
Decision
No. The payment to the company is not taken into account in calculating, for the purposes of subsection 130-90(4) of the ITAA 1997, the amount for which the employee acquired the share.
Facts
Under an employee share scheme, employees of a company were offered shares in the employer company provided, amongst other things, they made a payment to the company as consideration for the shares.
These payments were received by the company as contributions to share capital.
The company issued the shares to the trustee of an employee share trust and the employees acquired beneficial interests in the shares.
At a later time, when all the relevant conditions were satisfied (including payment to the company for the shares), the employees became absolutely entitled to the shares as against the trustee.
The employees paid nothing to the trustee, either directly or indirectly.
Reasons for Decision
Subsection 130-90(4) of the ITAA 1997 requires that the amount for which a share is acquired by the beneficiary must not be greater than the cost base of that share to the trustee at the time of the transfer.
Subsection 130-90(4) of the ITAA 1997 is aimed at sparing the trustee a tax liability for a capital gain that arises due to the use of market value, as with subsection 104-75(3) of the ITAA 1997. This may arise in circumstances in which the trustee of an employee share trust has transferred shares to a beneficiary pursuant to an employee share scheme without having actually received any capital proceeds. The intended purpose of subsection 130-90(4) of the ITAA 1997 is not achieved if the trustee makes a capital gain that does not reflect the true nature of the transaction, as is the case when payment for shares is directed away from the trustee.
Subsection 130-90(4) of the ITAA 1997 achieves the appropriate outcome if amounts not included in the trustee's capital proceeds, such as payments made directly to the company issuing the share, are excluded from amounts covered by that provision. This approach to subsection 130-90(4) of the ITAA 1997 presents a purposive interpretation and is consistent with both the emphasis on legislative purpose and the focus in the subsection on the trustee's dealings (see Bermingham v. Corrective Services Commissioner of NSW (1988) 15 NSWLR 292 at 302 per McHugh J.).