EXPLANATORY STATEMENT
Select Legislative Instrument 2010 No. 8
Income Tax Assessment Act 1997
Income Tax Assessment Amendment Regulations 2010 (No. 1)
Section 909-1 of the Income Tax Assessment Act 1997 (the Act) provides that the Governor‑General may make regulations prescribing matters that the Act requires or permits to be prescribed, or are necessary or convenient to prescribe for carrying out or giving effect to the Act.
Item 87 in Schedule 1 to Tax Laws Amendment (2009 Budget Measures No. 2) Act 2009 (the Budget Measures Act) provides that regulations made for the purposes of or relating to Division 83A of the Act may take retrospective effect from any time on or after 1 July 2009, provided the regulations are made within three months of the commencement of the Budget Measures Act (14 December 2009).
An employee share scheme provides employees with a financial interest in the company they work for through the distribution of shares in that company.
The purpose of these Regulations is to provide methods for valuing certain types of interests.
The Treasurer announced in the 2009 Budget that the Australian Government (the Government) will better target eligibility for the employee share scheme tax concessions and reduce opportunities for tax avoidance.
On 1 July 2009, the Government issued a policy statement setting out the final policy for the taxation of employee share schemes. On 14 December 2009 the Bills to give effect to this policy received the Royal Assent – the Budget Measures Act and the Income Tax (TFN Withholding Tax (ESS)) Act 2009.
These Regulations largely replicate the previously existing rules in relation to the valuation of unlisted rights acquired under an employee share scheme. The previous rules were repealed by the Budget Measures Act.
The Regulations provide a valuation methodology for certain unlisted rights acquired under an employee share scheme. Unlisted rights are rights to acquire shares in a company that is not publically listed on a stock exchange. The valuation tables in the Regulations apply to unlisted rights which are included in a taxpayer’s assessable income on or after 1 July 2009, have an exercise period of 10 years or less, and for which the time they are taxed under the employee share scheme tax rules is not aligned with the time of disposal of the right or underlying share.
The Regulations further give a choice between using the previously existing valuation rules or determining the market value according to ordinary concepts.
Drafts of the Regulations were released for public consultation on the Treasury website on 14 August 2009, as a part of the employee share scheme exposure draft package.
Details of the Regulations are set out in the Attachment.
The Regulations are a legislative instrument for the purposes of the Legislative Instruments Act 2003.
The Regulations are taken to have commenced on 1 July 2009, and when read with the Act apply to employee share scheme interests in relation to which an amount must be included in a taxpayer’s assessable income on or after 1 July 2009. As noted above, item 87 in Schedule 1 to the Budget Measures Act provides that the Regulations may take retrospective effect, despite subsection 12(2) of the Legislative Instruments Act 2003.
ATTACHMENT
Details of the Income Tax Assessment Amendment Regulations 2010 (No. 1)
Regulation 1: Names the Regulations as the Income Tax Assessment Amendment Regulations 2010 (No. 1).
Regulation 2: Provides that the Regulations commence on 1 July 2009.
Regulation 3: Provides that Schedule 1 amends the Income Tax Assessment Regulations 1997 (the Principal Regulations).
Schedule 1: Amendments
Item 1 inserts a Division 83A including new regulations 83A-315.01 to 83A-315.09 into the Principal Regulations.
The object of Division 83A is to preserve rules under the former Division 13A of Part III of the Income Tax Assessment Act 1936 about valuing unlisted rights to acquire a share under an employee share scheme.
These regulations broadly replicate the effect of former sections 139FC to 139FN of the Income Tax Assessment Act 1936, which were repealed on 14 December 2009 in Tax Laws Amendment (2009 Budget Measures No. 2) Act 2009.
These regulations set an amount that can be used instead of market value in relation to employee share scheme interests that are unlisted rights. Use of these regulations by a taxpayer is voluntary. Taxpayers may choose to calculate market value using general principles (as modified under Subdivision 960-S of the Act). [subregulation 83A‑315.01(1)]
Taxpayers are able to use these alternative valuation methodologies if the rights have an exercise period of 10 years or less, and the employee share scheme taxing point is not aligned with the time of disposal of the right or underlying share. In situations where an unlisted right has an exercise period of greater than 10 years, taxpayers are required to calculate the market value using general principles.
If the employee share scheme taxing point for a right is aligned with the time that the right or the underlying share is disposed of, taxpayers are required to calculate the market value using general principles. As the taxpayer generally receives the market value of the right or underlying share as consideration for its disposal, determining this calculation is likely to be simple and accurate. This situation may arise because the right or underlying share is disposed of at the same time as the deferred taxing point calculated under subsections 83A-120(4) to (7) of the Act, or due to application of the 30 day rule in subsection 83A‑120(3). [subregulation 83A‑315.01(2)]
The amount provided by the regulations is determined by reference to a point in time. Therefore, the amount is different for different days. The relevant amount to be used instead of market value is the amount calculated using the day for which the market value was to be calculated.
Regulation 83A-315.02 sets out how to calculate the amount that is to be used instead of market value and which ESS interests these rules apply to. Use of these rules instead of the general principles for calculating market value is limited to rights not quoted on an approved stock exchange (as defined in the Act). That is, it is limited to unlisted rights.
The amount that is to be used instead of market value is calculated as the greater of two possible amounts. The first possible amount (first amount) is the market value of the underlying share (using general principles as modified by the Act) reduced by the lowest amount that must be paid to exercise the right. The second possible amount (second amount) is calculated by reference to formulas and tables set out in regulations 83A‑315.05 to 83A-315.09.
If, in calculating the first amount, the lowest amount that must be paid to exercise the right cannot be ascertained or is nil, the amount provided by the regulations to be used instead of market value is the market value of the underlying share (using general principles as modified by the Act). [regulation 83A-315.03]
If the taxpayer has a beneficial interest in a share or right, regardless who has the legal interest, the value that is applicable for these Regulations is the value of the share or right, as opposed to the value of the interest. [regulation 83A-315.04]