Issue
Does former section 139DD of the Income Tax Assessment Act 1936 (ITAA 1936) treat options as if they were never acquired by a director if the options were provided as the director's sole remuneration but were subsequently lost without being exercised?
Decision
No. Where a director's only remuneration was in the form of options issued by the company, former section 139DD of the ITAA 1936 does not apply to treat those options as if they were never acquired where those options are subsequently lost without being exercised.
Facts
An Australian listed company issued options to acquire shares in the company to a director of the company as a reward and incentive for their services.
The options were issued prior to 1 July 2009 and were rights acquired under an employee share scheme within the meaning of former section 139C of the ITAA 1936.
The director did not pay anything for the options.
The options entitled the director, on payment of an exercise price, to acquire a corresponding number of shares in the company.
The options were issued with a life of 3 years and expired at the end of that time without being exercised.
The director was assessed on the value of the options in the year of acquisition.
Neither the director nor any associated entity received, or was entitled to receive, any other remuneration for the director's services.
The director was at all relevant times an Australian resident within the meaning of subsection 6(1) of the ITAA 1936.
Neither former section 26AAC of the ITAA 1936, nor Division 83A of the Income Tax Assessment Act 1997 (ITAA 1997) applies in relation to the receipt of the options.
Reasons for Decision
Former Division 13A of Part III of the ITAA 1936 provided for the taxation treatment of shares and rights acquired prior to 1 July 2009 under employee share schemes.
Former section 139DD of the ITAA 1936 provides that a right to acquire a share in a company is never acquired by a taxpayer if both of the following two requirements are satisfied: (1) The taxpayer loses the right without having exercised it: (2) The company was, at the time the right was acquired, the employer of the taxpayer or a holding company of the employer of the taxpayer.
'Employer' is defined by subsection 139GA(3) of the ITAA 1936 to be a person who pays, or is liable to pay, work and income support related withholding payments and benefits.
A company is taken to have paid work and income support related withholding payments and benefits if one or more of the following circumstances apply: • the company must withhold an amount from a payment it makes to the individual as a director of the company; • the director is assessable on personal services income under section 86-15 of the ITAA 1997 for their services to the company; or • the company is required to pay an amount to the Commissioner under Division 14 of Schedule 1 to the Taxation Administration Act 1953 (TAA) because it provides certain non-cash benefits to the director.
A company that provided remuneration to a director solely in the form of options under an employee share scheme was not required to withhold from any payment to the director.
The company did not make a payment in relation to personal services income assessed to the director under section 86-15 of the ITAA 1997.
While options are a non-cash benefit, former paragraph 14-5(3)(d) of Schedule 1 to the TAA (as applicable at the time the director received the options) excluded benefits constituted by shares and rights acquired under an employee share scheme.
The sole remuneration in the form of options was therefore not a work and income support related withholding payment or benefit.
Accordingly, the company was not, at the time the options were acquired, the employer of the taxpayer or a holding company of the employer of the taxpayer. The second requirement for the operation of section 139DD of the ITAA 1936 is not met and the director is therefore not entitled to an amendment to have the value of the options excluded from the assessment in the year the options were acquired.