Announcements
We understand 2020 has been difficult and we're here to try and make it easier during tax time. Search posts, read articles or ask a question.

ATO Community

Employee share programs, PAYG & CGT events

Highlighted

I'm new

Views 1158

Replies 1

Seeking guidance on this i Employee share program, CGT and PAYG scenario, if the CGT ends up being less than the tax paid up front.

 
Let's say the following scenario happens:
 
In 2014, Michael makes a share purchase through an employee share program where the Market value 1000 shares = $20,000. The Cost base to Michael is $10,000 hence receiving discount of $10,000.
 
At time of purchase, Michael’s PAYG payment would be 48% (effective TAX rate) of $10,000 on the discount = $4800 (tax up front for unsold shares but exercisable)
 
24months later, In 2016, Michael sells the 1000 shares at the market value  $22,000.
 
From the cost base of $10,000 in 2014, this is a total capital gain of $12,000. Because the shares were held for more than 12 months, Michael should receive a 50% discount on CGT.
 
If the effective tax rate is 48%, then the discounted CGT would be calculated at 24% = $2880.
 
Given that Michael has paid $4800 tax up front and should only need to pay $2880 on this transaction. In this scenario, Michael expects to be refunded $1920. How should Michael process this tax event, given that the CGT event does not seem to be defined as a capital loss?
 
Thanks Smiley Happy
 
 
1 ACCEPTED SOLUTION

Accepted Solutions
Highlighted

Best answer

ATO Certified

Community Support

Replies 0

Hi @citizenE,

 

Thanks for your patience whilst we sort specialist information regarding your question.

 

If your employee share scheme does not qualify for ‘deferral’ of the amount of the $10,000 ‘discount’, the discount will form part of your assessable income in the year that it was granted.  Ordinarily PAYG withholding does not apply to these amounts.  The amounts may be taken into account as part of PAYG instalments calculation after you lodge your tax return.  Where the discount is included in your assessable income, the cost base of the share will be its market value of $20,000 and deemed to be acquired at the time of being granted the shares. Any amounts of PAYGI instalments that are paid may be offset against future tax return liabilities, but sometimes also subject to further PAYG liabilities if the ESS income is recurrent.

 

When Michael sells the shares in the 2016 year for $22,000 he will make a net capital gain of $1,000, (22000-20000, reduced by the 50% discount) which will be added to his assessable income for that year. In preparing his 2016 tax return, the assessable income of $1,000 is added to other income and reduced by available deductions to arrive at a taxable income figure on which tax is paid.

 

You can find more information about Employee share schemes on our website.

 

Hope this helps.

 

1 REPLY 1
Highlighted

Best answer

ATO Certified

Community Support

Replies 0

Hi @citizenE,

 

Thanks for your patience whilst we sort specialist information regarding your question.

 

If your employee share scheme does not qualify for ‘deferral’ of the amount of the $10,000 ‘discount’, the discount will form part of your assessable income in the year that it was granted.  Ordinarily PAYG withholding does not apply to these amounts.  The amounts may be taken into account as part of PAYG instalments calculation after you lodge your tax return.  Where the discount is included in your assessable income, the cost base of the share will be its market value of $20,000 and deemed to be acquired at the time of being granted the shares. Any amounts of PAYGI instalments that are paid may be offset against future tax return liabilities, but sometimes also subject to further PAYG liabilities if the ESS income is recurrent.

 

When Michael sells the shares in the 2016 year for $22,000 he will make a net capital gain of $1,000, (22000-20000, reduced by the 50% discount) which will be added to his assessable income for that year. In preparing his 2016 tax return, the assessable income of $1,000 is added to other income and reduced by available deductions to arrive at a taxable income figure on which tax is paid.

 

You can find more information about Employee share schemes on our website.

 

Hope this helps.