Alert

Who does this affect?

Any company who has offered or any employees who have participated in an employee share scheme prior to 1 July 2009 where employees have deferred tax under the existing regime until after 1 July 2009.

What do you need to do?

Consider the impact of the proposed changes on offers made before 1 July 2009. Review administrative systems to ensure they comply with the proposed reporting and withholding requirements for offers made before 1 July 2009. Consider whether to make a supplemental tax disclosure to employees. Consider making a submission regarding the proposed transitional provisions.

Authors
Darren McClafferty  
Senior Associate

Kai-Chen Chang  
Solicitor

Sarah Guy  
Solicitor

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Andrew Clements  
Partner
T +61 3 9643 4089

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Treasury has released draft transitional provisions for the proposed amendments to the employee share scheme rules (Draft Transitional Rules). The Draft Transitional Rules are a significant departure from the previous understanding that the proposed amendments would only apply to shares or rights acquired on or after 1 July 2009.

Under the Draft Transitional Rules, the proposed amendments will affect shares or rights acquired prior to 1 July 2009 where employees were not taxed on the shares or rights before 1 July 2009 (Affected Pre 1 July Employee Shares and Rights).

This will significantly increase the administrative obligations for employers for shares and options already provided under the existing regime. For example, employers will be required to report and potentially withhold amounts in respect of Affected Pre 1 July Employee Shares and Rights.

There are also likely to be significant unintended consequences because of a failure to properly grandfather the application of the old laws, particularly in relation to the capital gains tax treatment of the shares and rights.

The extension of the proposed amendments to Affected Pre 1 July Employee Shares and Rights is likely to significantly increase the complexity for employees in complying with their tax obligations. The Draft Transitional Rules may also affect existing disclosures that have been made by companies in respect of Affected Pre 1 July Employee Shares and Rights.

Summary of Draft Transitional Rules

The Draft Transitional Rules provide that the proposed amendments will impact on employee equity provided to employees depending on:

• when the employee acquired their relevant interest, and

• whether the employee had been taxed on those interests prior to 1 July 2009.

Under the Draft Transitional Rules, all of the proposed amendments will, as foreshadowed, apply to shares or rights acquired after 1 July 2009 (subject to a tie-breaker rule).

The Draft Transitional Rules also provide that for interests acquired before 1 July 2009, the proposed amendments will not have any effect if the employee had already been taxed on their interests under the existing regime before 1 July 2009.

However, for interests acquired before 1 July 2009 where the employee had deferred tax under the existing regime until a time on or after 1 July 2009 (being Affected Pre 1 July Employee Shares and Rights), certain aspects of the proposed amendments will apply.

In relation to Affected Pre 1 July Employee Shares and Rights, the provisions in the proposed amendments that will apply include the following:

• the changes to the 30 day rule (where the employee disposes of their shares or rights at arm’s length within 30 days of their deferred taxing point), but the deferred taxing point will still be based on the existing rules

• the proposed reporting and TFN withholding regimes

• the rules relating to the determination of the market value of the relevant shares or rights (and therefore the amount on which the employee is assessed on their deferred taxing point), and

• the proposed amendments to the rules relating to the interaction between the employee share scheme provisions and the other regimes (such as the capital gains tax regime).

However, the proposed amendments will not affect the ability of an employee to obtain a refund on forfeited shares or rights. That is, the ability of the employee to obtain a refund will be determined under the existing regime.

Submissions

Treasury has invited submissions on the Draft Transitional Rules by 22 September 2009.

Mallesons intends to make a submission regarding the Draft Transitional Rules. Should you have any particular concerns in relation to the operation of the proposed amendments which you feel should be raised, please feel free to contact us.