Upcoming Mallesons seminarsParticipants and administrators of employee share and option schemes
What do you need to do?Consider impact of proposed changes
Andrew Clements
Partner
T +61 3 9643 4089
Sydney
Justin Cherrington
Perth
Proposed changes in the 2008-09 Budget may affect both participants and administrators of employee share and option schemes. Participants may be affected by the proposed changes to the election requirements, particularly if they are seeking to obtain the benefit of the 50% capital gains tax (CGT) concession. Administrators of employee option warehouse trusts will welcome the proposed CGT relief to prevent double taxation.
Participants - Tax return to be conclusive evidence of election to be taxed upfront
Under the proposed changes, an employee participating in a qualifying share or option scheme will be taken to have deferred taxation unless the employee includes a relevant amount in their tax return for the tax year in which the shares or options were acquired. It is proposed that these changes take effect with respect to shares and options acquired from 1 July 2008.
Background - Employees may choose to be assessed upfront or to defer taxation
Employees who are granted qualifying shares or options under an employee share or option scheme may make an election to be taxed upon grant. In the absence of an election, the employee will defer taxation in respect of the share or option until a later time.
Historically, an employee may have preferred to defer taxation. However, in light of the 50% CGT exemption, an employee may prefer to be taxed on their shares or options upfront (that is, at the time of grant).
Whether the employee prefers to defer taxation or to be assessed upfront may depend, in part, on the employee’s ability to fund a tax liability upon grant and the level of expected growth in the value of the underlying shares. In making a decision to defer taxation or to be assessed upfront, the employee will also need to take into account all of the qualifying shares and options acquired in the relevant tax year. This is because an election to be assessed upfront will apply to all qualifying shares or options acquired in that year.
Election may be required to be taxed upfront
If tax deferral is available in relation to shares or options, the employee must make an election if they wish to be taxed upfront. The election must be made in the approved form and before the employee lodges their tax return for the relevant tax year (or within such further time as the Commissioner allows).
This election is not required to be lodged with the Australian Taxation Office. Typically, the way in which an employee prepares their tax return for the relevant tax year would indicate whether or not an election has been made. However, because the election is not required to be lodged, it may be difficult to establish when the election was actually made (in particular, whether it was validly made before the employee lodged their tax return).
Proposed changes seek to provide certainty in relation to elections
Under the proposed changes, if an employee does not include an amount in respect of shares or options granted under an employee share or option scheme in their tax return for the relevant tax year, they will be taken to have deferred taxation. It is proposed that the changes take effect with respect to shares and options acquired from 1 July 2008.
It may be appropriate for forthcoming employee invitations to make reference to these changes. More detailed disclosure can be made once draft legislation is available.
Administrators - Prevention of double taxation for shares held in trust to satisfy options
A number of employee option schemes involve a warehouse trust holding shares to satisfy the exercise of options granted to employees.
Under these schemes, the disposal of a share by the warehouse trust to an employee (in satisfaction of the exercise of an option) may give rise to a capital gain unless relief is available. In some circumstances, an employee may be assessed by reference to the same gain.
Under the proposed changes, this double taxation will be removed by providing the trustee (or beneficiary) of the warehouse trust with CGT relief when an employee, on exercise of rights, becomes absolutely entitled to the shares held in the trust. It will be important that the proposed changes also deal with shares which, following exercise, continue to be held in trust for a period (i.e. shares subject to a continuing restriction on dealing). Importantly, it is proposed that the relief only take effect in relation to CGT events occurring from 7:30pm (AEST) on 13 May 2008.
Other factors may also impact upon the ability of a trust to warehouse shares to satisfy options granted to employees.
Further information
Further information in relation to these proposed changes is available in the Treasurer’s media release of 13 May 2008 (No. 44).