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.