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Who does this affect?

Any companies or employees that offer or participate in employee share schemes, or are considering offering or participating in employee share schemes.

What do you need to do?

Consider the impact of the proposed changes on current or proposed employee share schemes, and whether to make a further submission to Government regarding the proposed rules.

Authors
Andrew Clements  
Partner

Darren McClafferty  
Senior Associate

Kai-Chen Chang  
Solicitor
Andrew Clements  
Partner
T +61 3 9643 4089

Further changes to Australian Employee Share Scheme rules announced - 1 July 2009

The Assistant Treasurer has issued a press release and policy statement (Press Release) setting out the Government’s “final” tax treatment of shares and rights acquired under employee share schemes. The Press Release contains some welcome changes from the initial proposal and the consultation paper and draft legislation that was released on 5 June 2009.

The Government’s proposed amendments to the taxation of employee share schemes are significant. The announcement moves the operation of the proposed changes more closely towards the existing rules. However, the proposed changes will still have a major impact on the way employee equity is provided in Australia.

A copy of the Press Release is available here.

Summary of key changes from consultation paper

The key elements of the Government’s proposal include:

  • $1000 exemption threshold increased - the threshold for the availability of the $1,000 tax exemption will be increased from adjusted taxable income of more than $150,000 to more than $180,000.
  • extension of deferral concession - tax deferral will be available for schemes which include a “real risk of forfeiture”. This deferral may be extended until disposal restrictions under the scheme cease. This may provide greater certainty to employees regarding their assessment time.
  • salary sacrifice schemes - tax deferral will also be available for a salary sacrifice scheme for up to $5,000, even if the scheme does not have “real risk of forfeiture”.
  • reporting obligations remain but reduced in scope - the reporting obligations for employers will be reduced to remove the obligation to report the market value of shares or rights provided those shares or rights are not taxed upfront, and
  • cessation of employment remains a taxing point - for schemes which qualify for tax deferral a cessation of employment will continue to be a taxing point.

A number of these proposals are consistent with our submissions to Government.

The Press Release also indicates that guidance regarding the meaning of “real risk of forfeiture” will be provided through examples in explanatory and ATO materials.

Certain aspects of the amendments will be referred to the Board of Taxation for their consideration. These include:

  • whether start-up, research and development and speculative-type companies should be provided with additional deferral arrangements, and
  • the rules for the valuation of shares or rights provided under employee share schemes.

Summary of key concerns in relation to the changes

There are some significant issues that the Government has not addressed. These include:

  • guidance regarding “real risk of forfeiture” - it would be better for guidance to be included in the legislation, rather than the explanatory memorandum and ATO material as proposed. Legislative guidance should minimise the need to obtain rulings from the ATO and provide greater certainty.
  • tax deferral on salary sacrifice plans arbitrarily restricted and limited - the limit on this concession appears to be unduly restrictive and the threshold for the availability of tax deferral for such plans of $5,000 appears arbitrary and too low. It is unclear why this concession should be available only for plans that involve “salary sacrifice” rather than short term incentive arrangements more generally.
  • restrictions on ability to obtain refund for out of the money options - the Government remains committed to the proposal to prevent an employee from obtaining a refund where “out of the money” options are not exercised. This is likely to significantly restrict the offer of options.
  • withholding regime for employees not quoting TFNs - the proposed withholding regime will continue to apply in relation to employees who do not quote their TFN or ABN. Although such a regime is only likely to apply to a few employees, complying with such a regime for those employees is likely to be difficult and costly, and may be prohibitive for smaller companies, and
  • position for unlisted companies - the Government appears to recognise the issues faced by unlisted companies seeking to offer equity to their employees. The Board of Taxation enquiry is proposed to be limited to certain start-up, research and development and speculative companies. It should apply to unlisted companies more generally.

Transitional issues and further consultation

The Press Release provides that the proposed amendments are to apply for any shares or rights acquired after 30 June 2009. Shares or rights which have been acquired by employees on or before 30 June 2009 should not subject to the proposed new rules.

The Government indicates that it will undertake a further “three part forward plan of consultation with industry” that will involve referring certain issues to the Board of Taxation, committing to an Exposure Draft process and asking the Board of Taxation to consult with stakeholders.

The Press Release indicates that the proposed amendments will be introduced in the Spring sittings of Parliament.

We will continue to participate in this process to seek to ensure that appropriate outcomes are achieved. Our prior alerts on the Government’s proposed reforms to the taxation of employee share schemes are available here.

This publication is only a general outline. It is not legal advice. You should seek professional advice before taking any action based on its contents.