Guerdon Associates submission to Treasury for ESS Taxation Bill

Guerdon Associates recently lodged its submission on the Employee Share Scheme (ESS) taxation exposure documents released by the Government on the 14th January 2015.


Under the proposed ESS tax changes, tax-deferred options and rights will be taxed on exercise rather than on vesting (or when disposal restrictions on the shares acquired on exercise of those rights or options are lifted). Tax can be deferred on rights subject to an immediate restriction on disposal, without the requirement for a forfeiture condition. The maximum tax deferral period has been extended from 7 years to 15 years. For qualifying start-ups the treatment is even better, with no tax on the discount at which options are acquired or on up to 15% of the discount at which shares are acquired, and with capital gains tax only on the value delivered to the employee on share sale (see our summary HERE).


Overall we welcome the proposed amendments. However we have suggested further changes that could be made to better align the interests of employees with investors.


One of our primary concerns with the Exposure Draft is in the definition of a start-up. Currently the draft bill defines a start-up as an unlisted Australian-resident company that has been incorporated for less than 10 years, with aggregated turnover of less than $50 million (including revenues from associated companies) in the prior tax year and where the market value and other conditions are met for the ESS interests to be granted. It is our view that these are too strict and that some start-up companies and their employees that should be eligible for the tax concessions are missing out.


We have suggested that the definition include listed entities, with the maximum turnover requirement confined to the entity and not its associates, and with the maximum life increased from 10 years to at least 15 years. We also suggest that there be an alternative profit test. That is, a start-up would not have a taxable profit. This would mean a company could  be considered to be a ‘start-up’ if it meets two out of three of a. less than $50 million turnover, b. less than 15 years incorporation and/or c. no taxable profit condition. In our view this is a fairer and more relevant definition.


The Exposure Draft limits the start-up tax concessions to shares and fair market value options. We believe that the range of permitted equity vehicles could be broadened in order to include share appreciation rights (SARs) and market share units (MSUs). Both of these vehicles work in a similar way to options but in some situations are more appropriate than options or rights. We see no reason why they should not be included and qualify for the same concessions as options.


Like many others, we would also like to see the cessation of employment removed as a deferred taxing point for all companies and employees with unvested equity. Removing this condition can enhance consistency and simplicity, reduce administrative costs for companies and improve governance by encouraging management to ensure sustainability over the longer term by creating and maintaining an effective legacy.


The full copy of our submission can be found HERE.

© Guerdon Associates 2024
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