by Hayden Bentley, Reece Walker and Melinda
Earlier this week the Government released exposure draft
legislation in relation to the changes to Australia's taxation
of employee share and option schemes (ESS), which
were announced in December last year.
The draft legislation confirms the proposed concessions allowing
'start-ups' to issue shares at a discount of up to 15% to
market value, or grant of 'out of the money' options in
circumstances where employees will potentially pay no tax until the
shares are ultimately sold.
To qualify for the 'start up' concessions certain
conditions related to the status of the employer and the terms of
the scheme must be satisfied.
For the employer:
the company must be unlisted, with aggregated (group) turnover
of up to $50 million
the employer company, its holding company and subsidiaries must
have been in existence for less than 10 years, and
the employer company (although not necessarily the issuing
entity) must be an Australian resident taxpayer.
For the scheme, the general conditions that currently apply to
all ESS concessions must be satisfied and the scheme must require
employees to satisfy a 3 year holding period in relation to the
interests acquired (unless employment ceases earlier).
On sale, the shares will be subject to capital gains tax
(potentially providing access to the CGT 50% discount).
While the above concessions will not be available for companies
which are not 'start-ups', the proposals do allow the
deferral period to continue beyond what is allowed under the
For example, the deferral period in respect of options granted
under an employee share scheme may be extended until options are
exercised (even in circumstances where any forfeiture conditions
have already been removed and options have vested).
Further, while deferral will still end if an employee ceases
employment, the maximum time limit on deferral (for both shares and
options) will be extended from 7 to 15 years.
The rules also:
allow certain rights schemes to access deferred taxation
treatment even where they do not contain a real risk of forfeiture
(for example, where the scheme genuinely restricts an employee from
disposing of their rights and expressly states that it will be
subject to deferred taxation)
double the existing significant ownership and voting rights
limitations from 5% to 10% (but ensuring all interests are taken
into account, even those which may not have been exercised),
amend the provisions entitling employees to a refund of tax
paid on the grant of options in circumstances where the employee
chooses not to exercise that right.
As part of this process, the Government also released updated
safe harbour valuation tables, which are currently used in valuing
unlisted rights issued under employee share schemes. Unexpectedly,
most of the changes to these tables appear to provide a more
favourable result than under the current tables (which were already
generally considered to be concessionary).
The Australian Taxation Office has also been given the role of
consulting with industry with a view to developing approved safe
harbour market valuation methodologies to reduce compliance costs
in maintaining an ESS. Once agreed, use of those methodologies to
value an ESS interest in an unlisted entity may be relied upon by
the taxpayer – a welcome initiative that has the potential to
significantly impact the practicality of private companies issuing
shares and options to employees (particularly where the market
valuation methodologies adopted are practical).
As foreshadowed by the announcement late last year, the new
proposals will only apply to shares or options issued on or after 1
July 2015. Until that time, shares and options issued to employees
will be taxed under current rules.
McCullough Robertson will be running seminars on the proposed
changes to the taxation of employee share schemes in Brisbane and
Sydney once final legislation is released later this year.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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