Australian employee share scheme tax draft legislation has come, and gone!

On 14 August 2009, Treasury released the government’s latest explanatory material on the proposed new employee share plan tax arrangements and an exposure draft of the legislation to give effect to the changes (see HERE).  Submissions on the exposure draft package closed on 31 August 2009.

The exposure draft is generally consistent with the policy statement issued by the Assistant Treasurer, Senator The Hon Nick Sherry, on 1 July 2009 (see the GuerdonNews® article HERE and the policy statement HERE).

The draft has some good news and some bad news.

The good news is that the government will now allow deferral of taxation beyond the vesting point while restrictions (that were imposed at acquisition) on the ability of the employee to trade shares or rights remain in place.  There the good news ends.

Overall, we remain concerned that the complexity of the proposed employee share plan tax regime, and the uncertainties associated with such key concepts as what constitutes a ‘real risk of forfeiture’, will make it more difficult for taxpayers to comply with the provisions, encourage the development of arrangements to minimise tax and make revenue collection more difficult and costly than it needs to be.

Our biggest concern, however, is that employees can be liable for income tax on options that do not provide any reward to the employee. The government’s argument has been that whether an option is ever in the money reflects the investment risk the employee takes on when the option is granted. In practice, the employee has taken on the investment risk by accepting the option in lieu of cash remuneration.  The employee wins if the option provides a reward and loses (the value of the foregone cash remuneration) if it does not. The rewards received by the employee should be taxed as income; but if there are no rewards received, there should be no tax liability. 

A fair approach would be to apply income tax at the point at which the employee realises value under an employee share scheme.  With shares and performance rights, this would be when the shares/rights vest to the employee.  With options, this would be when the options are exercised, not when they become exercisable; there would be no opportunity to pay tax ‘upfront’.  

Taxing the benefits actually realised under employee share schemes would also mean there would be no need to consider establishing different rules for start-up, research and development and speculative companies – if option grants pay off, the rewards to employees will properly be subject to income tax.  If the grants do not deliver any value, then there is nothing to tax. 

This suggested approach is entirely consistent with the government’s expressed objectives for the employee share plan tax legislation while also supporting the continued use of equity-based incentive plans. 

Of course, the proposed new reporting requirements for employee share schemes should continue; these will go a long way to addressing the government’s concerns about tax avoidance under such schemes.  We have shared the government’s concerns on this matter, and support the reporting requirement.

So what does this mean for your company?  If you can’t wait, and consistent with earlier articles, we suggest:

  • Proceed with any share rights plan (i.e. zero exercise price options), but be aware of the requirements for deferral if you wish to defer tax beyond the vesting date
  • Forget about granting options (i.e. “at the money” or even premium priced options)
  • Proceed with general employee tax exempt plans if you have a large proportion of your workforce earning under $180,000, but make sure you have good communications
  • Suspend NED tax deferred fee sacrifice plans

If you are considering a start-up company wait, if you can, for the Australian Tax Board’s advice on how they should be singled out, if at all, for special treatment.  But if you are sceptical, you may want to consider emigrating to any one of the almost all other OECD countries that tax options on realised value.

The full text of our submission on the explanatory draft materials is available at HERE.

© Guerdon Associates 2024
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