Australian government changes taxation for employee share schemes

It has taken years and thousands of submissions from Guerdon Associates and other professional service firms, companies and individuals to governments of all persuasions to bring Australia into line with nearly all OECD countries (see our summary of efforts since 2009 by searching “Employee Share Scheme submission”, searching by All Words, on our website HERE).

The Budget delivered on 11 May 2021 announced that termination of employment will no longer be a taxing point for employee share scheme interests (see page 16 of Budget Paper No. 2 HERE).

Taxing employee share scheme interests at the time of termination of employment has been a huge bugbear of companies, investors and employees (see one of our early but still valid submissions from 2009 HERE). This intransigence by governments has defied logic as Guerdon Associates has argued for many years that there would be little or no cost to government revenues. Economic modelling has shown that the deferred tax would be offset by higher tax paid in later years on higher levels of share price growth. It just took a pandemic for an excuse to allow a huge budget deficit that could hide a rational change that, nevertheless, has a short term budgetary impact.

This change will apply to equity incentives granted to employees from the first income year after the date of Royal Assent of the enabling legislation. So, if an amending bill is passed by both houses of Parliament before 1 July, this change will apply to equity incentives granted in FY22. This means a bill needs to be introduced and passed in these winter sittings.

If the amending bill is not introduced and passed by the end of the winter sittings on 24 June, the change will not take effect until after 1 July 2022.

The budget forecasts assume the latter.

This amendment will appeal to local and foreign institutional investors. As we explained in December, the UK Investment Association (IA), with 250 members managing over £8.5 trillion, considers that a post-employment shareholding requirement should apply for at least two years at a level equal to the lower of the shareholding requirement immediately before departure or the actual shareholding on departure (see HERE).

A post-employment shareholding requirement is a significant practice in the UK, as it is in the US. It features in the UK Corporate Governance Code. It is a practice that is also gaining traction in Europe.

We suspect it is only a matter of time before investors will lobby for it in Australia. This change will remove some of the pain that executives would no doubt feel.

Room for more improvement

While the above change is welcome, we should not lose sight of the range of other improvements that could have been made. These include:

  • Extend the start-up concessions to include ASX-listed companies, many of which would be eligible other than for the fact they have listed to get better access to capital. Our submission in June last year to the Parliamentary enquiry provides more detail see HERE.
  • Improve the start-up concession by limiting the $50m revenue cap to the entity rather than the group.
  • Improve the salary sacrifice arrangements by removing the $5,000 cap. Again, there is no tax to be lost, just deferred.
  • Increase the $1,000 tax-exempt plan to a tax exemption on $5,000 recognising that the $1,000 limit has not changed in more than 20 years – no bracket creep here. Alternatively, scrap it and permit a tax free discount on qualifying employee share plans as applied in many countries, including the US.

Corporations law changes

The Government also announced in the Budget two changes to the Corporations Act that will make it easier for unlisted companies to grant equity to employees.

The information disclosure requirements and the licensing, anti-hawking and advertising obligations will be removed for employers that grant equity to employees and:

  • do not charge employees for their equity interest; and
  • the equity is not granted under a loan arrangement.

Where employers do charge or lend, unlisted companies will be able to grant equity valued at up to $30,000 per employee per year (currently $5,000).

These changes alleviate some of the administrative costs for unlisted companies trying to grant equity to their employees.

These changes will take effect three months after the enabling legislation gets Royal Assent. That is, not until well into FY22.

© Guerdon Associates 2024
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