Division 83A of the Income Tax Assessment Act 1997 (ITAA 1997) has, in a lot of situations, removed the ability to defer taxation on the issue of shares and options at a discount to employees.
As a result, an understanding of how the rules apply to tax the employee on their options and performance rights, and how the rules value the benefit received are imperative to ensure that employees don’t get stung come tax time.
The legislation provides that the taxable discount is equal to the “market value” of the shares/options less the amount paid by the employee. In most cases the employee does not pay anything, so the taxable discount equals the “market value”.
What is the market value?
The market value is determined as:
- The value of the share/option on an exchange; or
- The value worked out using a valuation technique; or
- For options, the value determined using the rules in the regulations
So practically, how do you work out the value?
For Employee Share Options, the methods can be any of the following:
- price on an exchange (if exchange traded, or listed)
- Black-Scholes model, Binomial Model or Monte Carlo Simulation valuation method
- Regulations to the ITAA 1997 – this is a version of the Black-Scholes with some assumptions
What is the cost of getting it wrong?
As employers are now required to report to the ATO on the discounts provided to employees, this can impact the employee when they lodge their tax return as they will have to pay tax on the discount reported/provided.
If you need assistance contact Value Logic – with the expertise and experience in valuing options and taxation advice, your reporting issues can be resolved.
Contact Value Logic to see how our employee option and performance right valuation services can help you add value to your business.