The Government has announced today its "Industry Innovation
and Competitiveness Agenda" that is designed to drive growth
and jobs in key industries. A key part of the agenda is changes to
the taxation treatment of employee share schemes.
The Government has recognised that changes made to the tax
treatment of Employee Share Schemes by the previous Labor
Government have effectively brought to a halt of the use of
employee share schemes by start-up companies. It proposes to
largely reverse those changes.
The changes announced today include:
For all companies
Reversal of the changes made in 2009 to the taxing point for
options such that options issued at a discount to employees will be
generally be taxed when they are exercised i.e. when they are
converted into shares.
For start-up companies
Introduction of a more favourable treatment of options or
shares provided by start-up companies. A start-up company has been
defined as an unlisted company that has been incorporated for less
than ten years and with a turnover of less than $50 million and the
no up-front taxation as long as the shares or options are held
by the employee for at least three years;
certain options will have the taxing point deferred until the
option is sold;
shares issued at a small discount will have the discount exempt
from income tax; and
extension of the maximum deferral time from seven to fifteen
There will also be an update to the 'safe harbour'
valuation tables used by companies to value their options to ensure
current market conditions are reflected.
The Treasurer will consult with industry to ensure that the
draft legislation will deliver the intended outcome, with the
legislation proposed to come into effect from 1 July 2015.
Whilst the purpose of employee share schemes is to generally
attract and retain high quality employees, in our experience
options issued under the current rules had the opposite effect. The
taxing point was before the employee received any cash to fund
their ultimate income tax liability.
Whilst the reversal of the changes made in 2009 is to be
welcomed, does that mean we are going back to the previous rules or
some new hybrid?
The inclusion of the definition of start-up company is very
positive along with the small discount being exempt from tax. We
also welcome the extension of the tax deferral from 7 to 15 years
however, if the shares will ultimately be subject to income tax the
taxing event still has to be linked to a liquidity opportunity to
overcome one of the more substantive issues of the current taxation
We would welcome any proposal to treat the shares as being
subject to capital gains tax rather than income tax during the tax
The income tax treatment of any property lease incentive will vary, depending on the nature of the inducement provided.
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