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What do you need to do?Consider the impact of the Bill on your existing and proposed employee equity schemes. Consider in particular whether amendments will need to be made to your employee equity plans.
Darren McClafferty
Senior Associate
Sarah Guy
Solicitor
Andrew Clements
Partner
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David Wood
Partner
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Sydney
Tim Bednall
Brian Murphy
Melbourne
Andrew Clements
Murray Kellock
Alison Lansley
Diana Nicholson
David Wood
Perth
Nigel Hunt
Robert Lilburne
Brisbane
Robert Jackson
Canberra
Ian Johnson
The Tax Laws Amendment (2009 Budget Measures No. 2) Bill 2009 and the Income Tax (TFN Withholding Tax (ESS)) Bill 2009 (the “Bills”) have been introduced into the House of Representatives.
The Bills contain some significant departures from the Exposure Draft Legislation released by Treasury on 14 August 2009. These include:
- provisions which expand the scope of the regime
- new limitations in the regime, and
- a number of welcome changes and clarifications to the exposure draft material.
Unfortunately the Bills have not addressed a number of significant issues previously raised in relation to the new regime.
Expansion of scope and additional limitations
The Bills have expanded the scope of the new regime and include additional limitations on the provision of employee shares and rights (an “ESS interest”). In particular:
- Indeterminate rights - the Bills extend the new regime to rights provided to employees which, whilst not initially being a right to acquire shares, subsequently become a right to acquire shares. This may include a right to an indeterminate number of shares or a right to receive an “employment benefit” generally, which is later settled by shares (plans with cash out alternatives may fall within this category).
In these circumstances the right will be considered to have been within the new regime at all times and will be taxable under Division 83A from the date of the original acquisition. The Commissioner is given the power to amend an assessment at any time for the purpose of taxing a right which later becomes an ESS interest |
- Salary sacrifice based tax deferral - tax deferral for rights based salary sacrifice schemes is now specified as being available. These schemes will require there to be a “real risk of forfeiture” in respect of those rights. Also the salary sacrifice based arrangements continue to be capped at $5,000, applied each year on a “per employee, per employment relationship” basis, in order for tax deferral to be available. This is likely to significantly reduce the relevance of salary sacrifice schemes, and
- Treatment under the CGT regime - the CGT provisions in the Bills have been substantially amended. In limited circumstances CGT may apply to trustees of employee share trusts on the allocation and transfer of ESS interests.
Amendments to the Exposure Draft legislation
The Bills contain a number of welcome clarifications and useful changes to the Exposure Draft Legislation. In particular:
- 75% “non-discriminatory” requirement - the 75% non-discriminatory requirement has been amended to provide that, in order to obtain deferred taxation for shares or concessional upfront taxation generally, the employee equity scheme (or a previous employee equity scheme) must have been offered to at least 75% of the permanent employees of the employer who have completed at least 3 years of service with the employer. This requirement may now be more easily satisfied, particularly in respect of small employers
- Takeovers and restructures - the takeover and restructure provisions have been amended to clarify that the three year minimum holding period, which is required to be satisfied in order to apply the concessional upfront taxation rules (the $1000 exemption), will be taken to be satisfied where shares are acquired under a takeover or restructure
- TFN declarations - the Bills provide that a TFN declaration given by an employee to an employer authorises the employer to inform the provider of the ESS interest of the employee’s TFN. This confirmation should limit the administration associated with the new TFN withholding regime
- Other clarifications - there are a number of other helpful clarifications in the Bills. For example the Bills confirm that:
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Significant issues remain outstanding
A number of significant issues identified in respect of the new regime have yet to be addressed. In particular:
- Tax deferral provisions - no further guidance has been provided in the Bills as to what circumstances will amount to a “real risk of forfeiture’. In addition, whilst the provisions dealing with the extent of tax deferral for shares and rights have been reorganised, a number of uncertainties remain as to their application.
- Restrictions on ability to obtain refund for out of the money options - a refund is still not available where options lapse because a holder chooses not to exercise them (for example, because they are “out of the money”). The Bills do confirm however that a choice to cease employment does not amount to a choice not to exercise the options.
We anticipate that further amendments may be made to this legislation during its passage in Parliament. Amendments may also be made following the enactment of this legislation as the full breadth of the consequences come to bear.