Cessation of employment no longer a taxing point

In our newsletter articles of 7 June and 9 August (see HERE and HERE) we advised that the federal government was to introduce legislation to remove cessation of employment as a deferred taxing point for employee share scheme interests.

Significantly, we explained that the change would only apply to equity incentives granted to employees from the first income year after the date of Royal Assent of the enabling legislation. This meant that existing equity grants would continue to be taxed on cessation of employment if they remained on foot.

We are pleased to advise that the draft Bill has changed this position.

The Corporate Collective Investment Vehicle Framework and Other Measures Bill 2021 that was introduced into parliament in the last week of November, now provides that cessation of employment will no longer be a taxing point for all ESS interests – those on foot and any future grants. This is a sensible change from the initial draft legislation and is to be welcomed.

So, the only question is when will the new rules become law:

  • If the Bill is passed by both houses and gets Royal Assent before 1 July 2022, then it will be effective from 1 July.
  • If the Bill is passed by both houses and gets Royal assent after 1 July 2022, then it will not become effective until 1 July 2023.

Unfortunately the government failed to get the legislation through the last sitting week of parliament. It has been referred to the Senate Economics Legislation Committee on 2 December 2021 with the committee’s report due by 3 February 2022. Further, there are only 5 days in February and March on which both Houses of Parliament are scheduled to sit. While we do not see any opposition impediments to the proposed changes as it arose from a joint parliamentary committee enquiry, it is difficult to determine whether the Bill will be prioritised for debate in those five days before an election is called. Otherwise it may be back to square one with possibly a new federal government.

So, if we do get a 1 July 2022 start, there are some key points for executives and directors to think about:

  • Unvested equity that is share settled can remain on foot post employment for testing in the normal course without tax liabilities arising for the executive
  • Investors and proxy advisers may expect executive KMP to retain vested equity interests post-employment for at least two years, as currently applicable to a growing and significant proportion UK and now US companies
  • Vested equity that is under a restriction on sale can remain restricted without a tax liability arising for the executive post employment, providing full dividend and ownership rights.

For the technically minded, HERE is the Bill with the relevant amendment in Schedule 10.

This is not the only legislation impacted by a Parliament that does not appear to meet sufficiently to enable government to happen. The Financial Accountability Regime Bill 2021 (FAR Bill) will not pass into legislation this year; instead, it has been referred to the Senate Economics Legislation Committee, with a report due by 15 February 2022.

The Senate Committee will consider six topics largely related to the administration of the regime, including:

  • whether the Minister should have a broad power to provide exemptions to the Financial Accountability Regime and if it is, whether guidance can be provided on the exercise of that power, noting the potential for a broad, unconstrained exemptions power to undermine the regime. This is something we noted in our submission and also in relation to its BEAR predecessor;
  • if the arrangement entered into between APRA and ASIC to jointly administer the regime should be tabled in each of the Houses of Parliament, and the details of that arrangement be left to delegated legislation.
© Guerdon Associates 2024
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