Issue
Where prior to 1 July 2009 unlisted rights (old rights) are provided as consideration for the acquisition of new rights, when working out whether the new rights have been acquired under an employee share scheme to which former Division 13A of Part III (Division 13A) of the Income Tax Assessment Act 1936 (ITAA 1936) applies, is it necessary to value the old rights using former section 139FC of the ITAA 1936?
Decision
Yes. When working out whether the new rights have been acquired under an employee share scheme for the purposes of former Division 13A of the ITAA 1936, the value of the old rights provided as consideration for the new rights must be valued using former section 139FC of the ITAA 1936.
Facts
On 1 January 2003 an employee was granted unlisted rights to shares
On 1 January 2005 the employee was granted further rights (new rights) to shares.
As consideration for the grant of the new rights, the employee surrendered the old rights they had acquired on 1 January 2003.
The new rights were granted in relation to the employee's employment and entitled the employee to acquire shares in the employer company.
Reasons for Decision
Former Division 13A of the ITAA 1936 provides for the taxation treatment of shares and rights acquired by taxpayers prior to 1 July 2009 under employee share schemes.
Where prior to 1 July 2009 an employee acquired a right to acquire a share, and the right was acquired in relation to the employee's employment for less than market value, the discount given in relation to the right was included in the employee's assessable income under former subsection 139B(1) of the ITAA 1936.
However, if the consideration for the acquisition is equal to, or more than, the market value of the right at the time it is acquired, the employee is taken not to have acquired the right under an employee share scheme.
To determine whether the new rights have been acquired at a discount (that is, for less than market value), both the old rights provided as consideration and the new rights must be valued.
Section 21 of the ITAA 1936 applies where consideration is given otherwise than in cash. Under subsection 21(1) of the ITAA 1936 the money value of the consideration is deemed to have been paid or received.
The money value of shares or rights in these circumstances is the same as the market value of the shares or rights ( Case 88 13 CTBR (NS) 571).
Where the consideration given is a right (irrespective of whether the right was acquired under an employee share scheme or otherwise) Subdivision F of former Division 13A of the ITAA 1936 applies to determine the market value of the right where the market value is required to be determined for any of the purposes of Division 13A.
Determining the market value of consideration provided for the acquisition of a right under an employee share scheme is clearly such a purpose.
Former section 139FC of the ITAA 1936 provides the methodology for calculating the market value of an unlisted right on a particular day.
The market value of the old rights provided as consideration must therefore be determined in accordance with section 139FC of the ITAA 1936