Alert

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

Kai-Chen Chang  
Solicitor

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Andrew Clements  
Partner
T +61 3 9643 4089

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On Friday 5 June 2009, the Federal Government released its options paper and draft legislation for the proposed amendments to the taxation of employee share schemes announced in the recent Federal Budget, for public consultation. The options paper and draft legislation contain significant changes to the existing rules relating to the taxation of employee share schemes. These are likely to significantly alter the way in which offerings of shares and options are designed and undertaken.

Key changes

Some of the key changes include:

• New compliance regime - a new compliance regime will be introduced to ensure that the tax payable on awards under employee share schemes is paid. This will include not only a reporting regime for employers, but a withholding regime for those employees who do not quote their TFNs to their employers.

• Deferral based on “real risk of forfeiture” - the availability and extent of any tax deferral available will be based on a concept of “real risk of forfeiture”. This has the potential to create uncertainty as to the time of assessment for employees.

• Removal of ability for taxpayers to make election - employees will no longer have any choice in the way in which their participation in employee share schemes are taxed. The manner in which employees are taxed will depend solely on the way in which the relevant scheme is designed.

• Restriction in ability to obtain refunds - refunds for tax paid on shares or rights under employee share schemes that are forfeited will only be available if the relevant employee did not choose for those shares or rights to be forfeited. This has the potential to result in some inappropriate outcomes for employees who forfeit their entitlements.

• Increase in threshold for $1,000 exemption - the $1,000 tax exemption will be available for participation in complying schemes if the employee’s taxable income, after adjustment, is less than $150,000.

Important transitional concession

As a transitional concession, the proposed amendments that are to be made will not be effective until 1 July 2009. This means that any offers of shares or options made around the time of the Budget which are completed prior to the end of the financial year will not be caught by the new rules.

It will be important to consider which offers should be made prior to 1 July 2009.

Submissions to Treasury

The deadline for submissions regarding the proposed amendments as outlined in the options paper is 12 June 2009.

Impact on existing schemes

As a result of these proposed changes, it is anticipated that many companies will need to redesign the terms of their offers to ensure that the interests of both the companies and employees are properly protected.

Summary of proposed amendments

The Government intends to repeal the existing employee share scheme rules in Division 13A entirely and introduce a completely new set of rules for the taxation of employee share schemes.

It is proposed that:

• all employee share schemes be classified either as “concessionally taxed schemes” and all other schemes (based on the existing qualifying shares or rights test)

• “concessionally taxed schemes” that qualify for the $1,000 tax exemption (based on the existing exemption conditions) will be taxed upfront at grant

• “concessionally taxed schemes” that do not qualify for the $1,000 tax exemption will be taxed at the “ESS deferred taxing point”, which is the earlier of:

• any scheme that is not a “concessionally taxed scheme” will be taxed at grant.

This means that an employee’s ability to choose when they are taxed has effectively been removed.

The Government also announced a number of other proposed amendments, including:

• the availability of the $1,000 tax exemption will be restricted to those persons earning less than $150,000 (subject to certain adjustments)

• the introduction of annual reporting requirements for employers to provide details each year of any shares or rights acquired under employee share schemes during the year, and the recipients of those rights

• the introduction of a withholding system for employers in respect of shares or rights under employee share schemes provided to employees who have not quoted a TFN or ABN

• amendments to the existing market valuation rules under which a general law concept of market value is used subject to any regulations made by the Government, and

• amendments to the existing rules relating to the forfeiture of shares or rights such that a refund is available when a share is forfeited. Importantly, the ability of a participant to obtain a refund of tax if options lapse will be removed if the lapse is at the participant’s election. This is a significant change.

We issued an alert on the proposed changes when they were first announced (click here to view) and when the Federal Government subsequently announced that it would be consulting on the proposed changes (click here).

For more information please contact the Mallesons Tax Team