Australian Tax Office provides clarity for share units and share appreciation rights taxation

With unvested equity taxed at cessation of employment and share options taxed on vesting rather than exercise, more companies are implementing share unit and share appreciation rights plans.


However, while there has been a trend to these pay vehicles since new share scheme taxation was introduced in 2009, there remained some uncertainty as to their tax treatment. The ATO has now clarified the Fringe Benefits Tax status of such interests. 


The ATO has confirmed that ‘indeterminate rights’ granted under an employee share scheme are not fringe benefits.


On the facts considered in ATO Interpretative Decision 2010/142 (see HERE) employees were granted rights to acquire:


·             Either shares in the company or cash, to be determined at a future time at the discretion of the company; or


·             A number of company shares, where that number cannot be determined at the time of grant but will be determined at a future time.


At grant it is unclear whether the rights are excluded from the definition of ‘fringe benefit’ (under paragraphs (f) or (h) of sub-section 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)), because at that time the rights acquired by the employee are not ‘ESS interests’ for the purposes of Division 83A of the Income Tax Assessment Act 1997 (ITAA) and, if they are rights to shares or cash, it is also unclear if the employee will ultimately receive cash that would on payment be considered salary or wages.


Where they are ultimately settled with shares instead of cash (or when the number of shares the employee is entitled to receive is determined), the indeterminate rights will be treated as if they had always been ESS interests (under section 83A-340 of the ITAA) and will thus be excluded from the definition of ‘fringe benefits’ by para 136(1)(h) of the FBTAA.


Alternatively, where an employee’s indeterminate rights are ultimately settled with cash instead of shares, the granting of the rights will be viewed not as a separate benefit but as one in a series of steps in the payment of salary or wages, and thus excluded from the definition of ‘fringe benefit’ by para 136(1)(f) of the FBTAA.

© Guerdon Associates 2024
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