Revenue Tax Briefing Issue 52, May 2003

Share Options Payment of Tax

Payment of tax in respect of share options in certain circumstances

Section 7, Finance Act, 2003 amends the payment arrangements in relation to income tax due in respect of the acquisition of shares under share options granted under unapproved share option schemes. Under existing rules, when such an option is exercised, an income tax charge arises, under Section 128 TCA 1997, on the gain from the exercise of the option, that is, on the difference between the market value of the shares on the date of exercise and the amount paid for the shares (i.e,. the option price). The income tax is payable under self-assessment. However, in respect of share options exercised on or after 6 April 2000, the taxpayer may elect, under Section 128A TCA 1997, to defer the payment of the income tax for seven years or until the shares are disposed of, whichever is the earlier.

Section 7, Finance Act, 2003 provides for an extended deferral of the income tax liability in circumstances where the market value of shares acquired by the exercise of a share option has, when the income tax is due for payment, fallen below the amount of the income tax chargeable under Section 128, TCA 1997 in respect of the acquisition of the shares.

Section 7, Finance Act, 2003 also abolishes the existing option to defer payment of the income tax for share options exercised after the passing of the Act (28 March 2003).

In the case of share options exercised before 6 February 2003, the new provision provides that payment of the income tax liability, whether currently due or deferred, may, at the election of the taxpayer, be satisfied by way of a payment on account equal to the market value of the shares at specified dates with the balance of the income tax being deferred until the taxpayer, or his or her spouse, disposes of the shares or any other shares. It should be noted in particular that:

Where income tax paid before 6 February 2003 exceeds the payment on account under these arrangements there is NO right to repayment of the excess, and
To qualify for this payment on account provision, any other income tax liability arising from the exercise of share options (and which does not qualify under this payment on account option) must have been paid or been included in an instalment arrangement acceptable to the Collector-General.

Section 8, Finance Act, 2003 provides for a new scheme of payment in respect of share options exercised on or after 30 June 2003 and this will be the subject of an Article in the next issue of Tax Briefing.

For the purposes of this article the following terms have the meanings set out hereunder:

‘relevant shares’: shares acquired between 6 April 2000 and the 5 February 2003 as a result of the exercise of an option.

‘relevant year’: the year of assessment in which the option was exercised.

‘any shares’: includes securities within the meaning of Section 135, TCA 1997 and stock (i.e., shares, securities, stock and any other interest in a company).

‘market value’: as defined in Section 548, TCA 1997. (i.e., in the case of shares quoted on a stock exchange the price quoted, and in the case of shares which are unquoted, the price they might reasonably be expected to fetch on a sale in the open market.)

Election

An election must be made by the individual to avail of the new payment provisions. The election must be made to his/her Inspector on or before 1 June 2003. This will be regarded as a protective election only for those individuals who fall into categories (a) (where the relevant shares have not yet been disposed of), (b), (c) and (d) below. The payment on account must be paid to the Collector-General on or before 30 June 2003 by individuals falling into categories (a) (where the relevant shares have been disposed of) and (e) below.

There are five categories of individuals who may elect for the new provision to apply.

(a) Persons who had already made an election under section 128A to defer the payment of income tax due on the exercise of a share option and dispose of the relevant shares within the seven year deferral period.

Where an individual has already made an election to defer the payment of the income tax due on the exercise of share options and disposes of the relevant shares within the seven year deferral period the income tax would be due on 31 October following the year in which the relevant shares were sold.

Under the new provision where:

The market value of the relevant shares at the date of disposal was less than the income tax due, and
The income tax due on the exercise of the share option is still unpaid

an individual may, following an election to his/her Inspector on or before 1 June 2003, make a payment on account to the Collector-General equal to the market value of the relevant shares on the date of disposal of the relevant shares. The payment must be made by the later of 30 June 2003 or 30 days after the date of the disposal of the relevant shares. Any tax paid before 6 February 2003 which is in excess of the payment on account will NOT be refunded.

The balance of the income tax due after the payment on account will become due for payment by reference to the net gains, after tax, made by the individual, or his or her spouse (please refer to the paragraph on ‘Disposals by Spouse’ below), on any subsequent disposal of any shares after the date of disposal of the relevant shares.

Example 1

Mr A exercised his share option on 1 June 2000. The income tax due as a result of the exercise of the share option was €50,000. He made his election to defer the income tax due on the exercise of his share option on or before 31 January 2002. Mr A sold his shares on 1 July 2002.

The market value of the relevant shares at the date of sale was €30,000.

Prior to the Finance Act, 2003 Mr A would have to pay income tax of €50,000 to the Collector-General on or before 31 October 2003.

Following the Finance Act, 2003 Mr A may make an election on or before 1 June 2003 to make a payment on account equal to the market value of the relevant shares at the date of disposal of the relevant shares.

Mr A pays €30,000 to the Collector-General on or before 30 June 2003.

Mr A sells other shares on 1 May 2005 with a net gain of €80,000 (after income tax, if due, and capital gains tax). The balance of the income tax due, €20,000 must be paid to the Collector-General on or before 31 October 2006.

Example 1A

If in Example 1 Mr A did not sell the relevant shares, acquired as a result of the exercise of the share option on 1 June 2000, he may following the Finance Act, 2003 make a protective election on or before 1 June 2003 to make a payment on account equal to the market value of the relevant shares at the date of disposal of the relevant shares.

If Mr A sells the relevant shares on 1 July 2004 for €30,000.

The payment on account (€30,000) must be made on or before 30 July 2004.

(b) Persons who elected under section 128A to defer the income tax due on the exercise of a share option and still hold the relevant shares at 31 December in the year of assessment beginning seven years after the relevant year.

Where an individual has already made an election to defer the income tax due on the exercise of a share option and still retains the relevant shares at 31 December in the year of assessment beginning seven years after the relevant year, the income tax would be due on 31 October in the year of assessment following the year of assessment beginning seven years after the relevant year.

Under the new provision where such an individual:

Still retains the relevant shares at 31 December in the year of assessment beginning seven years after the relevant year, and
The market value of the relevant shares at that 31 December is less than the income tax due on the exercise of the relevant shares,

he/she may, following a protective election to his/her Inspector on or before 1 June 2003 make a payment on account to the Collector-General equal to the market value of the relevant shares at that 31 December. The payment must be made within 30 days after that 31 December.

The balance of the income tax due after the payment on account will become due for payment by reference to the net gains, after tax, made by the taxpayer, or his or her spouse (please refer to the paragraph on ‘Disposals by Spouse’ below), on any subsequent disposal of any shares after that 31 December.

Example 2

Mr A exercised his share option on 1 June 2000. The income tax due as a result of the exercise of the share option was €60,000. He made his election to defer the income tax due on the exercise of his share option on or before 31 January 2002. Mr A still retains the relevant shares at 31 December 2007.

The market value of the relevant shares at 31 December 2007 is €40,000.

Prior to the Finance Act, 2003 Mr A would have to pay €60,000 to the Collector-General on or before 31 October 2008.

Following the Finance Act, 2003 Mr A may make a protective election on or before 1 June 2003 to make a payment on account equal to the market value of the relevant shares at the 31 December 2007.

Mr A pays €40,000 to the Collector-General within 30 days of 31 December 2007.

Mr A sells other shares on 1 May 2009 with a net gain of €80,000 (after income tax, if due, and capital gains tax). The balance of the income tax due, €20,000 must be paid to the Collector-General on or before 31 October 2010.

(c) Persons entitled to make an election, under section 128A, after 6 February 2003 and on or before 31 October 2003 or 31 October 2004 as appropriate, to defer the income tax due on the exercise of a share option but did not do so (i.e., persons who exercised share options between 1 January 2002 and 5 February 2003).

Prior to the Finance Act, 2003 the income tax due on the relevant shares would be payable by such individuals on or before 31 October 2003 or 31 October 2004 as appropriate irrespective of whether the relevant shares were sold or retained on those respective dates.

Under the new provision such an individual may make a protective election on or before 1 June 2003 and avail of the following:

Where the income tax due on the relevant shares is payable on or before 31 October 2003 or 31 October 2004 as appropriate, and
The market value of the relevant shares at
1. the 31 October 2003 or 31 October 2004, as appropriate, where the relevant shares are still retained, or
2. the date of disposal if the relevant shares have been disposed of before 31 October 2003 or 31 October 2004 as appropriate,
is less than the income tax due,

the individual may following an election to his/her Inspector on or before 1 June 2003 make a payment on account to the Collector-General equal to the market value of the relevant shares at:

31 October 2003 or 31 October 2004 as appropriate, or
the date of disposal, if earlier.

The payment must be made within 30 days after 31 October 2003 or 31 October 2004 as appropriate.

Example 3

Mr A exercised his share option on 1 June 2002. The income tax due as a result of the exercise of the share option is €60,000. He makes no election to defer the income tax due on the exercise of his share option on or before 31 October 2003. Mr A still retains the relevant shares at 31 October 2003.

The market value of the relevant shares at 31 October 2003 is €40,000.

Prior to the Finance Act, 2003 Mr A would have to meet his preliminary tax obligations and pay any balance of the €60,000 to the Collector-General on or before 31 October 2003.

Following the Finance Act, 2003 Mr A may make a protective election on or before 1 June 2003 to make a payment on account equal to the market value of the relevant shares at the 31 October 2003. Mr A pays €40,000 to the Collector-General within 30 days of 31 October 2003.

Mr A sells other shares on 1 May 2006 with a net gain of €80,000 (after income tax, if due, and capital gains tax). The balance of the income tax due, €20,000 must be paid to the Collector-General on or before 31 October 2007.

Example 4

The market value of the relevant shares at 31 October 2003 is €80,000.

Mr A has to meet his preliminary tax obligations and pay any balance of the €60,000 to the Collector-General on or before 31 October 2003.

Mr A makes a protective election on or before 1 June 2003 to make a payment on account equal to the market value of the relevant shares on 31 October 2003. The provisions of Section 7, Finance Act, 2003 are not available to Mr A at 31 October 2003 as the market value of the relevant shares at that date is greater than the income tax due.

(d) Persons entitled to make an election under section 128A to defer the income tax due on the exercise of a share option before 6 February 2003 and where the relevant shares have been disposed of but the income tax is not due until 31 October 2003 or 31 October 2004 as appropriate.

Prior to the Finance Act, 2003 the income tax would be payable by such individuals on or before 31 October 2003 or 31 October 2004, as appropriate.

Under the new provision:

Where the income tax due on the relevant shares is payable on or before 31 October 2003 or 31 October 2004 as appropriate, and
The market value of the relevant shares at the date of disposal is less than the income tax due,

an individual may make a protective election on or before 1 June 2003 and make a payment on account to the Collector-General equal to the market value of the relevant shares at the date of disposal.

The payment must be made within 30 days after 31 October 2003 or 31 October 2004 as appropriate.

Example 5

Mr A exercised his share option on 1 June 2002. The income tax due as a result of the exercise of the share option is €60,000. He made his election to defer the income tax due on the exercise of his share option on 1 August 2002. Mr A sold the shares on 1 December 2002.

The market value of the relevant shares at 1 December 2002 was €40,000.

As Mr A sold the shares in the same year as the share option were exercised he was not entitled to make an election to defer the income tax due on the exercise of the share option.

Prior to the Finance Act, 2003 Mr A would have to meet his preliminary tax obligations and pay any balance of the €60,000 to the Collector-General on or before 31 October 2003.

Following the Finance Act, 2003 Mr A may make a protective election on or before 1 June 2003 to make a payment on account equal to the market value of the shares at the date of disposal.

Mr A pays €40,000 to the Collector-General within 30 days of 31 October 2003.

(e) All other cases

In all cases other than those referred to above where an individual has exercised a share option:

Before 6 February 2003, and
The market value of those shares on 6 February 2003 or at the date of disposal if earlier, is less than the income tax due

he/she may, following an election to his/her Inspector on or before 1 June 2003 make a payment on account to the Collector-General equal to the market value of the shares at 6 February 2003 or the date of disposal if earlier.

The payment must be made by 30 June 2003.

Example 6

Mr A exercised his share option on 1 June 1999. The income tax due as a result of the exercise of the share option is €60,000. No election to defer the income tax is available. Mr A still retains the relevant shares at 6 February 2003.

The market value of the relevant shares at 6 February 2003 is €40,000.

Prior to the Finance Act, 2003 Mr A would have to meet his preliminary tax obligations and pay any balance of the €60,000 to the Collector-General on or before 30 April 2001.

Following the Finance Act, 2003 Mr A may make an election on or before 1 June 2003 to make a payment on account equal to the market value of the relevant shares at the 6 February 2003.

Mr A pays €40,000 to the Collector-General on or before 30 June 2003.

Example 7

Mr A exercised his share option on 1 June 1999. The income tax due as a result of the exercise of the share option is €100,000. No election to defer the income tax is available. Mr A still retains the shares at 6 February 2003 at which date the market value is €40,000.

Prior to the Finance Act, 2003, Mr. A had entered into an instalment arrangement with the Collector-General for the payment of the income tax and at 6 February 2003, €50,000 had been paid.

Following the Finance Act, 2003 Mr A may make an election on or before 1 June 2003 to make a payment on account equal to the market value of the shares at the 6 February 2003 i.e. €40,000.

As Mr A has already paid in excess of the payment on account he does not for the present have to pay any further income tax. However, he is NOT entitled to repayment of the €10,000 paid in excess of the payment on account.

Mr A sells other shares on 1 May 2005 with a net gain of €80,000 (after income tax, if due, and capital gains tax). The balance of the income tax due, €50,000 must be paid to the Collector-General on or before 31 October 2006.

Balance of income tax remaining unpaid

It should be noted that where a payment on account has been made and the balance of the income tax liability deferred, then the balance remaining unpaid will be due for payment by reference to subsequent disposals of any shares by the taxpayer or his or her spouse.

The amount to be paid in any year of assessment in respect of the outstanding liability will be the lesser of:

The net balance(s) of income tax remaining unpaid, by reference to paragraphs (a), (b), (c), (d) or (e), after any previous payments have been taken into account, and
The aggregate of the net gains (if any) arising from share disposals by the taxpayer and/or his or her spouse in that year of assessment.

The net gain from any particular disposal is the excess (if any) of the market value of the shares at the date of disposal over the acquisition costs (option price and ancillary costs) and any tax chargeable or actually paid (depending on the circumstances) in respect of the acquisition or the disposal of those shares. Where the shares disposed of are shares in respect of which the income tax has been deferred under the new provision, credit in computing the net gain will be given only for income tax actually paid in respect of the shares prior to the disposal. Where the disposal is of shares to which the new provision does not apply, then credit will be given for the income tax chargeable in respect of the acquisition of those shares. The due date for the payment of the sum is 31 October in the year following the year in which the disposals take place.

Example 8^*

Mr A exercised his share option on 1 June 2000. The income tax due as a result of the exercise of the share option was €50,000. He made his election to defer the income tax due before 31 January 2002. Mr A sold his shares on 1 July 2002.

The market value of the relevant shares at the date of sale was €30,000. Mr A makes an election on or before 1 June 2003 to make a payment on account based on the market value of the relevant shares at 1 July 2002. This payment is made on 30 June 2003.

Mr A sells other shares (not acquired under a share option) on 1 May 2005. The market value of these shares was €100,000. Mr A acquired these shares on 1 June 2004 for €80,000. The net gain is calculated as follows:

Capital gains tax due on sale of shares 1 May 2005
Sale proceeds	€100,000
Cost	€80,000
Chargeable Gain	€20,000
Capital gains tax due @ 20% = €4,000
Net gain is therefore
€100,000 - (€80,000 + €4,000)= €16,000

Payment of balance of income tax due
Income tax due on exercise of share option	€50,000
Payment on account on 30 June 2003	€30,000
Balance of income tax due	€20,000
Payment due 31 October 2006	€16,000
Balance still outstanding/deferred	€ 4,000

Example 9^*

Mr A exercised his share option on 1 June 2000. The income tax due as a result of the exercise of the share option was €60,000. He made his election to defer the income tax due on the exercise before 31 January 2002. Mr A sold his shares on 1 July 2002.

The market value of the relevant shares at the date of sale was €30,000. Mr A makes an election on or before 1 June 2003 to make payment on account based on the market value of the relevant shares at 1 July 2002. This payment is made on 30 June 2003.

Mr A exercised another share option on 1 August 2003 for a price of €80,952. The market value of the shares was €200,000 giving rise to an income tax liability of €50,000 Mr A sells these shares on 1 July 2004 when their market value was €300,000. The net gain arising from this disposal is calculated as follows:

Income tax liability for share options exercised 1 August 2003
Market value of shares at 1 August 2003	€200,000
Option Price	€80,952
Share option gain	€119,048
Income tax due €119,048 at 42% = €50,000

Capital gains tax liability for shares sold 1 July 2004
Sale proceeds		€300,000
Cost
Price paid	€80,952
Amount chargeable to income tax	€119,048	€200,000
Chargeable Gain		€100,000
Capital gains tax due @ 20% = €20,000
Net gain is therefore
€300,000 - (€80,952 + €50,000 + €20,000) = €149,048

Payment of balance of income tax due on options exercised on 1 June 2000
Income tax due on exercise of share option	€60,000
Payment on account on 30 June 2003	€30,000
Balance of income tax due	€30,000
Payment due 31 October 2005	€30,000

Persons wishing to avail of the provision

An individual who wishes to avail of the new provision must make a written election to his/her inspector, on or before 1 June 2003, on Form SO3 (available at www.revenue.ie) and make the required payment on account to the Collector-General on or before the required payment date.

Late Election

There is provision for the admission of a late election in circumstances where Revenue is satisfied that the late election was due to absence, illness or other reasonable cause. Applications for late elections should be made in writing to the individual’s Inspector outlining the reason(s) for the late election.

Where a person fails to comply with the provision

Where an individual, having elected to avail of the new provision, subsequently fails to comply fully with its requirements, the full liability to income tax will be due and payable as if no election was made and interest and penalties will arise where relevant.

Death

Where an individual who has availed of the provision to defer the income tax due on the exercise of a share option or to make a payment on account dies, the balance of any outstanding liability will be discharged by the Revenue Commissioners, and will not be a charge on the estate of the deceased person.

Payments prior to 6 February 2003

Any amounts paid prior to 6 February 2003 in respect of income tax arising on the exercise of a share option will not be repaid.

Disposals by spouse

The reference to the disposal of any shares by an individual who has availed of the new provision includes disposals by his/her spouse where they are assessed to tax on the aggregation basis or where a transfer takes place between spouses on or after 25 February 2003 except where the spouses are separated or the marriage has been dissolved.

Loss for capital gains tax purposes

Where an individual makes an election under paragraphs (a) to (e) above, any capital loss arising on the disposal of those shares will not be available for set off until the full income tax liability due as a result of the exercise of a share option has been paid.

Part disposal

The payment on account provision applies to part disposals of relevant shares.

Interest

The due date for the payment of income tax deferred on the exercise of a share option will, for the purposes of interest on overdue tax, be the date when the sum is due and payable.

Options exercised on or after 6 February 2003

The payment on account provision cannot be claimed in respect of income tax due on share options exercised on or after 6 February 2003.

Deferral of income tax on the exercise of such share option(s) can continue to be claimed under the old regime for share option(s) exercised between 6 February 2003 and 28 March 2003.

The election to defer the income tax due on the exercise of share option(s) will no longer be available in respect of share options exercised after 28 March 2003.

Tax Briefing Issues No 40, 41, 46, 48 and 50.

Footnotes

^*For the purpose of this example indexation and the capital gains tax annual exemption have been ignored.

Revenue Tax Briefing