Government clarification on employee share scheme tax changes in the budget– including changed election requirements for $1,000 tax exemption
01/09/2008
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Readers will recall that the May 2008 Federal Budget included two measures affecting the tax treatment of shares or rights acquired under employee share schemes. At the time there were media reports that the government was closing a loophole allowing executives to unfairly minimise tax.

We reported on the proposed changes in the June edition of GuerdonNews® HERE). 

One of these was that from 1 July 2008 the Government is going to ensure that income from employee share schemes is included in assessable income if a taxpayer elects to be assessed upfront. 

Media speculation that this measure would allow employees who receive multiple share and rights grants in a given tax year to elect to be taxed upfront on those grants for which they included details in their tax return for the year of grant, and to defer tax on the other grants, prompted us to write to the Government seeking clarification.  We also sought confirmation that the conditions attaching to the $1,000 tax exemption concession have not changed.

Any uncertainties about the impact of the Budget measures with respect to fringe benefits tax and employee share schemes were removed when they were given legislative effect through the Tax Laws Amendment (Budget Measures) Act 2008, No 59 of 2008, which came into effect from 30 June 2008 (see the amending Act HERE).

The reply to our email of 22 May 2008 came from the office of the Assistant Treasurer, the Hon Chris Bowen MP, on 31 July, and advised that the Commissioner of Taxation has confirmed that an election to be taxed upfront in relation to one grant of shares or rights under an employee share scheme (made under section 139E of the Income Tax Assessment Act 1936) continues to apply to all shares or rights acquired in that same income year under an employee share scheme. 

The discount received on all qualifying shares and rights acquired in that income year will need to be included in an employee’s tax return for that income year.

The amendments confirm that an election to be taxed upfront (under section 139E(1)) must be made in the taxpayer’s return of income for the acquisition year (section 139E(2).  However, the Commissioner may allow the election to be made at a later time if requested by the taxpayer in the approved form (section 139E(2A)).

The Commissioner also confirmed that the existing eligibility conditions for the $1,000 tax exemption continue to apply.

In a new development, however, the Commissioner of Taxation advised that the legislative amendments have changed the election requirements.  Where the exemption conditions are satisfied and the total discount is $1,000 or less, taxpayers will not have to make an election or include the amount of the discount on those shares or rights in their tax return for the relevant income year (see section 139E(2B).

Where the taxpayer satisfies the exemption conditions but the discount is more than $1,000, they will still need to make an election and include the amount of the discount above $1,000 in their tax return for the relevant income year.

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