CGT questions for employees

A recent Administrative Appeals Tribunal (AAT) case which considered whether an employee was entitled to the capital gains tax 50 percent discount on share options acquired under an employee share scheme (ESS) has raised questions.

The critical issue contained in the Mangat and FCT [2018] case was the determination of when exactly Dr Mangat had acquired the ESS interest and therefore whether she had held the share options for 12 months prior to the cancellation.

Dr Mangat started employment with the company when she signed an employment contract on 30 December 2011 and contended that the employment contract contained the offer of share options. However, the ATO was successful in its argument that that the taxpayer acquired the share options when she completed a Share Purchase Application Form on 17 August 2012.

In March 2013, the share options were cancelled because the company was converted into a public company. This resulted in a capital gain for Dr Mangat of $494,190. As the ESS interests were acquired less than 12 months before the cancellation, she was not eligible for the discount method to calculate her capital gain.

This particular case has highlighted several key issues. Firstly, there is a need for employees to carefully consider ESS being proposed and to seek advice and understand the tax consequences of their later disposals of ESS interests.

In this case, the employee had incorrectly assumed that the offer of an ESS upon signing an employment contract was sufficient enough to be considered a legally enforceable right to acquire an ESS interest, however the AAT instead found it was when application of options was made.

Additionally, for companies that are considering offering their employees ESS, they should seek advice to make sure that this is appropriately designed to maximise the incentive to staff.

In this case, the fact that the company listed less than 12 months after the ESS was issued and forced these to be cancelled illustrates that the ESS offered was never going to provide a long-term incentive to staff so perhaps a different offer should have been made to the employees.

This article was written by Amy Wark, HLB Mann Judd Melbourne.