Government releases exposure draft of Employee Share Scheme tax amendments

The government has released draft amendments to the rules for the taxation of employee, executive and director share rights and options.


For all companies, the taxing point for options and rights that are subject to a forfeiture condition or a disposal restriction will be moved to when they are exercised rather than when they vest.  Deferral can be extended beyond exercise if the share obtained from exercising the right is subject to a real risk of forfeiture or genuine restrictions on sale.


This change will bring Australia into line with overseas competitors for attracting talented technical specialists, directors and executives.


In addition, special concessions will apply for ‘start-ups’.


The exposure draft legislation, regulations and explanatory statement for amendments to the taxation of employee share schemes (ESS) were released late yesterday (on 14 January).


It is now clear that:

  • It will be possible to defer tax on rights (including options) without those rights having to be subject to a risk of forfeiture (the current treatment for rights subject to forfeiture conditions will continue):

  • the maximum period for tax deferral is to be extended to 15 years from the current 7 years, whenever deferral applies;

  • tax paid on options that are not exercised because they remain underwater will be recoverable;

  • eligibility for the ESS tax concessions will be extended to employees (and their associates) who own or control the voting on up to 10% of their employer (i.e. a doubling of the current 5% limits).

The start-up concessions will allow employees to receive fair market value options tax free and then to only pay capital gains tax on the disposal of the share acquired on exercise of the option.


This concession should be particularly attractive to entrepreneurs and their funders in the technology and bio-tech industries. Other key competitor countries, such as the US, apply income tax to the gains on “non-qualified” options.


A less useful concession for most start-ups is that on acquisition of shares employees will not have to pay income tax on a discount to the market price of up to 15% at the time of acquisition and CGT will apply on disposal of the share acquired with a cost base reset at market value.


However, these special start-up concessions remain limited to unlisted companies that have been incorporated for less than 10 years and have aggregated turnover of less than $50m in the prior income year.


The implications of the new legislation are significant for remuneration frameworks and strategies. Guerdon Associates will be preparing more comprehensive articles in the days and weeks ahead addressing these, as well as the legislation itself. The ESS tax changes will also be a key topic for discussion at the 2015 Remuneration and Governance Forums to be held in March 2015 – see HERE.


If the announced changes are legislated from 1 July, boards may want to consider extending the maximum deferral period in their plans to 15 years (although in some circumstances this will have an accounting expense impact).  Boards wishing to grant tax-deferred rights (including options) without those rights being subject to a risk of forfeiture will need to ensure the scheme rules state that tax deferred treatment applies to the scheme and that the scheme restricts participants from “immediately” disposing of the right (the significance of the word “immediately” in this context is not clear yet, but we note that existing schemes generally prohibit the disposal of rights prior to exercise).


The government has also released an exposure draft of the revised valuation tables it is proposing to include in the Regulations to Division 83A that can be used to determine the value of an ESS right. To reflect market conditions, the new tables are based on revised assumptions that will be specified in a new Regulation. On the face of it the new assumptions used in the tables reduce the taxable value of options and other rights (see HERE).


The government’s latest documents are available HERE.


Written submissions can be lodged with Treasury until Friday 6 February 2015.


See HERE for details of the government’s original 14 October 2014 announcement on the taxation of employee share schemes.

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