Employee share schemes generally
Many employers choose to incentivise their employees by issuing the employees shares or options in the company (ESS interests). Often the ESS interests will be issued or granted to the employee at a discount. The scheme may be one where the employee is taxed up front on the value of the discount (even where the employee is yet to receive it) or one that meets certain conditions that allows the tax (or some of it) to be deferred.
Recognising the limitations the current legislation has placed upon the use of ESS’s, the federal government has now released draft legislation that aims to make them a viable means of incentivising employees.
It is proposed the changes will take effect in respect of ESS interests issued or granted from 1 July 2015.
The proposed changes
The main changes can be summarised as follows:
- a proposed change to the deferred taxing point of options such that the tax deferred point no longer occurs when the option can be exercised, it occurs when the right is exercised (for example, when the option is exercised to purchase a share), provided that the employee may then dispose of the resulting share (if there remains a risk of forfeiture or there are genuine restrictions on its disposal then the tax deferred point will be when those restrictions cease);
- an options scheme will no longer need to rely on the ‘real risk of forfeiture’ test to access tax deferred treatment provided that the scheme rules state that the tax deferred treatment applies and the scheme genuinely restricts an employee from immediately disposing of the option;
- the maximum deferral point for share and option schemes being extended from 7 to 15 years;
- new concessions for employees of small start-up companies (turnover >$50 million and incorporated within the last 10 years), that may mean employees who are granted:
o shares at up to a 15% discount of the market value, will pay no tax on the discount and capital gains on the sale with the market value as the cost base; or
o options exercisable at the market value when they are issued, will be able to defer their tax until the right or resulting share is sold;
- the ATO will develop safe harbour valuation methods in consultation with industry that will be binding on the ATO in respect to assessments;
- ASIC will develop standardised ESS documentation, which should hopefully ensure that ESS’s are both less expensive to implement and there are fewer pitfalls for newcomers.
The above provides a summary of key changes, there are other conditions that will apply to an ESS in order to ensure the scheme qualifies as a tax deferred scheme.
How can Groom Kennedy assist you?
The legislation is only in draft form at present. We recommend that, if you are considering implementing an ESS, you contact us to register your interest in being updated as new developments occur or to discuss any of the other conditions that apply in order that your proposed scheme is a scheme that satisfies the tax deferred conditions.