The Australian Government’s long anticipated changes to employee equity plan taxation
14/10/2014
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On 14 October the Australian Government released details of its long-anticipated changes to employee equity plan taxation, as part of its response to the National Industry Innovation and Competitiveness Agenda.

Under the proposals:

  • For most companies, the tax treatment for shares, options and presumably share rights provided to employees will be similar to the pre-1 July 2009 rules; and
  • More favourable rules will apply for employees of start up companies, particularly in relation to options.

For listed companies, and other companies not regarded as start-ups:

  • Options/rights provided under a “deferred tax scheme” (alas, not defined but possibly not requiring a risk of forfeiture) will be taxed on exercise, rather than when the options/rights vest
  • Shares will be taxed when any vesting conditions and subsequent disposal restrictions are lifted.

The revised treatment for options/rights will make use of options feasible again for executives of higher growth companies, and could open up the possibility of directors receiving rights or options in lieu of cash fees if deferral can be achieved without the risk of forfeiture. 

The ‘start up’ concessions will apply for companies that:

  • Have aggregate turnover of not more than $50 million
  • Are not listed
  • Have been incorporated for less than 10 years.

For start up companies:

  • The most useful new concession is that options will be subject to capital gains tax when the shares acquired on exercise of the options are sold.  Income tax will not apply when the options are exercised.  To qualify for this concession, options must not be ‘in the money’ when they are issued and must be held by the employee for at least 3 years. Certain other as yet not fully explained conditions may also apply.  It appears that the options will not have to be subject to a risk of forfeiture.
  • Employees will be also able to purchase shares or options in their employer at a discount of up to 15% from their market value, with no tax on the discount if the shares or options are held for at least 3 years. Capital gains tax would apply on the sale of the shares purchased with the discount or the shares acquired on exercise of the discounted options.
  • The maximum time for tax deferral will be extended from seven years to 15 years, to allow more time for start ups to succeed.

If tax deferral or the start up concessions do not apply, it will continue to be case that shares and options/rights for which the employee does not pay the full market value will be taxed on grant (‘upfront’). 

The changes are likely to be welcomed by all stakeholders, although it is disappointing that there is no firm commitment to removing cessation of employment as a taxing point under employee share schemes.  This change was recommended by the Productivity Commission in its report on executive remuneration in Australia. It is widely supported to encourage sustainable performance and decision-making by company executives. 

The existing $1,000 tax exemption for shares and options/rights obtained under an employee share scheme where there is no risk of forfeiture will continue for employees earning less than $180,000 per annum.  It is not clear whether the government will continue to permit the tax deferred acquisition of up to $5,000 of shares by salary sacrifice each year.

The government will retain integrity provisions introduced from July 2009.  These require employers to report employee share scheme benefits to the ATO and to deduct withholding tax if an employee does not provide their tax file number, and also tax an employee’s beneficial interests in shares in a trust as though the employee is the legal owner of those shares.

The Government will also update what it describes as the “‘safe harbor” valuation tables, which are used by companies to value their options, so they reflect current market conditions”. This is presumably intended to refer to the tables in the regulations where the current employee share scheme tax rules are located) that can be used to determine the taxable value of employees’ options.

Taken at face value the change may have a remarkable effect on director, executive and other employee remuneration. For example:

  • Directors could receive rights or options in lieu of cash fees
  • Executives and employees could salary sacrifice for share rights
  • Stock options could be granted to executives of higher growth companies

However, whatever the detail actually permits in the final version of the legislation, it is suggested that board remuneration committees review their calendar from around May 2015 with a view to considering the implications for their company’s director and executive remuneration.

The Treasurer is to consult with industry to ensure that the draft legislation delivers the intended outcome, with the legislation proposed to come into effect on 1 July 2015. 

Guerdon Associates will report on the tax changes as they progress, and will be liaising with Treasury in the consultation phase to ensure the changes are as effective as possible.  

The Government announcement can be seen HERE.

The fact sheet is available HERE.

Further detail, including an ESS implementation timeline, is in the government’s  Innovation and Competiveness Agenda report HERE.

© Guerdon Associates 2021
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