A recent tax case overturns commonly held views on the date that the taxable value of options or rights is calculated for tax purposes. It has usually been assumed that this is at the date of grant. In certain circumstances this may need a re-assessment.
In Taxpayer and Commissioner of Taxation  AATA 142the Administrative Appeals Tribunal (“AAT”) determined the acquisition date for options to purchase shares in a public company and therefore the date at which the discount was required to be included in the taxpayer’s assessable income, for the purposes of the former employee share scheme provisions contained in Division 13A of the Income Tax Assessment Act 1936 (“ITAA 1936”). The AAT held that the right to acquire ordinary shares includes a right to obtain options which, when exercised, result in the acquisition of ordinary shares.
The taxpayer commenced a position as the commercial director of a public company on 1 July 2003. Prior to commencing the position, the taxpayer and a director of the company had engaged in discussions and correspondence regarding the taxpayer’s remuneration package. In particular, it was discussed that the remuneration package would include options to acquire ordinary shares in the company. The taxpayer was subsequently appointed to the board of directors of the company on 3 September 2003. Following his appointment as director, the taxpayer was granted share options in the company at the Annual General meeting on 28 November 2003. The taxpayer and the company then executed an Option Deed on 22 December 2003.
Under section 139B, a taxpayer who acquired a share or right under an employee share scheme was required to include in their assessable income “the discount given in relation to the share or right.” The discount was to be calculated on the market value “of the share or right at the time when it was acquired by the taxpayer”. The taxpayer adopted 1 July 2003 as the date on which he acquired the options to purchase shares in the company. The Commissioner of Taxation (the “Commissioner”) made an amended assessment based on the correct date for the acquisition of the shares being 22 December 2003 or alternatively, 28 November 2003. As a result of movement in the share price the Commissioner’s amended assessment included an additional $443,500 in the taxable income of the taxpayer.
The Commissioner accepted that the taxpayer had, on 1 July 2003, a binding right to have the options granted to him. However, the Commissioner argued this was not the relevant right for the purposes of section 139B of the 1936 Act. The Commissioner argued s 139B contemplated a right that, when exercised, would immediately give rise to the transfer or acquisition of shares. According to the Commissioner, such a right was not granted until the company executed the Option Deed with the taxpayer on 22 December 2003 or, alternatively, when the shareholders approved the issuing of the options at the AGM on 28 November 2003.
The AAT did not accept the submissions of the Commissioner.
The AAT found that the right to acquire ordinary shares included a right to obtain options which, when exercised, would result in the acquisition of ordinary shares. The AAT found that the agreement reached with the taxpayer regarding the granting of options was not conditional on shareholder approval. In addition, the AAT noted that when the taxpayer initially commenced his employment he was not in fact on the board of the public company and therefore shareholder approval was not required. The AAT found that the relevant date of acquisition of the options was 1 July 2003.
Further details of this case can be found HERE.© Guerdon Associates 2023 Back to all articles