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This case concerns the timing for taxing certain share awards, the valuation of the resulting taxable benefit and the timing of employer's reporting of such taxable benefit.
Background
Under the restricted stock plan of a group, shares will be granted to the eligible employees with a 2-year vesting period. Subject to certain rules regarding cessation of employment during the vesting period, the employees will become entitled to receive the shares on the vesting date. The employees shall not be entitled to any voting right or dividends in respect of the shares awarded until such time those shares are transferred to them. At the time the awards are discharged, the employees will receive the awarded shares plus, at the discretion of the group, additional shares that could have been purchased by the amount of dividends arose during the vesting period.
The Ruling
- Taxable benefit will arise on the vesting date (i.e. not upon the mere enrolment of an employee to the plan or when an award is granted).
- The value of the taxable benefit would be the open market value of the shares on the vesting date.
- The taxable benefit should be reported by the employer in the year of assessment in which the award is vested.
Comments
The above ruling is consistent with the general understanding that taxable benefit under a share award plan will normally arise when the employees become entitled to the shares. The commentary in the ruling is also in line with the principle set out in revised Departmental Interpretation and Practice Notes (DIPN) 38 "Employee Share Option Benefits" (i.e. the timing of derivation and the valuation of the taxable benefit will generally be determined by the terms governing the awards and the circumstances under which such awards are granted). It is mentioned in the revised DIPN 38 that a separate DIPN dealing with the tax treatment of share awards will be issued. However, such DIPN has not be issued as of todate. |
