Alert

Who does this affect?

Companies and employees who plan to offer or participate in employee share schemes, or have offered or participated in employee share schemes from 1 July 2009

What do you need to do?

Review the exposure draft to assess the impact of the proposed amendments on your plans, and consider participating in the consultation process

Authors
Andrew Clements  
Partner

Darren McClafferty  
Senior Associate

Kai-Chen Chang  
Solicitor

---

Andrew Clements  
Partner
T +61 3 9643 4089

---

Karen Rooke  
Special Counsel
T +61 2 9296 2414

---

Treasury has released the much anticipated exposure draft and draft explanatory materials (Exposure Draft) for the proposed amendments to the taxation of employee share schemes. These measures were first announced as part of the Federal Budget on 12 May 2009.

The Exposure Draft follows the Assistant Treasurer’s policy statement that was released on 1 July 2009 (Policy Statement), as discussed in our earlier alert here.

The release of the Exposure Draft is welcome. It gives companies more certainty so they can start to move forward with equity offerings to employees.

The Exposure Draft largely reflects Treasury's “final” position as outlined in the Policy Statement.

There remain a number of significant concerns in relation to the operation of the proposal.

Limitations continue to apply on the availability of refunds for "out of the money" options which could result in unfair consequences for employees. The taxing point for options and performance rights is now accelerated to the time the option or performance right is exercisable rather than exercised.

The $5,000 cap for salary sacrifice schemes has been clarified as applying on a “per employee, per employment relationship” basis. The limit remains arbitrary and too low.

There are also concerns in relation to STI arrangements and the lack of guidance on the meaning of “real risk of forfeiture”.

Among the new material, unlisted companies appear to be winners, at least in terms of the valuation rules. These companies will no longer be required to obtain a full market valuation from an auditor in order to offer employees shares and rights.

More detail included in Exposure Draft

The Exposure Draft deals with some key issues outlined in Treasury’s Policy Statement:

• Deferred taxing point for shares and rights - the Exposure Draft provides limited detail in relation to the rules for determining the taxing point for shares, rights, and shares acquired upon exercise of rights, having regard to whether there is a “real risk of forfeiture” as well whether are any disposal restrictions.

• Salary sacrifice based tax deferral - as previously announced, tax deferral may be available where there is no “real risk of forfeiture” for salary sacrifice based arrangements capped at $5,000. This cap is to be applied each year on a “per employee, per employment relationship” basis. “Salary sacrifice” for these purposes may be broader than as previously understood.

• No need to obtain market valuation from auditor for unlisted shares - new rules and regulations have been included to address the determination of market value for shares and rights. Unlisted companies may no longer be obliged to use an auditor’s valuation if they can determine (and sufficiently justify) the market value of their shares using an alternative valuation method.

• Restrictions on ability to obtain refund for out of the money options - a refund may not be available where options lapse because a holder chooses not to exercise them (for example, because they are “out of the money”).

• Limited application of “30 day rule” - a modified version of the “30 day rule” has been introduced where the relevant shares or rights are subject to tax deferral.

• Takeovers and restructures - provisions for rollover relief for takeovers and restructures have been incorporated.

The Exposure Draft also contains rules relating to the interaction between the employee share scheme rules and the capital gains tax and other regimes.

The Exposure Draft provides, consistent with the Policy Statement, for the proposed amendments to apply from 1 July 2009. The Exposure Draft indicates that transitional arrangements (not yet drafted) will be provided to ensure the effect of the existing law is maintained for securities acquired before 1 July 2009. These provisions will be important.

Consultation process and way forward

It is hoped that a number of the issues in the Exposure Draft will be addressed through the consultation process with industry over the next month.

Submissions on the Exposure Draft are due by 31 August 2009. Mallesons intends to prepare a submission to Treasury regarding the Exposure Draft, and participate in the Board of Taxation’s consultation process.

Should you have any particular concerns in relation to the Exposure Draft which you feel should be raised, please feel free to contact us.

Mallesons will be organising client seminars in Sydney and Melbourne in relation to the Exposure Draft. Further details will follow.

A link to the page on Treasury’s website with the relevant materials is available here.