The Commonwealth Government has released draft legislation to
amend the taxation arrangements of Employee Share Schemes
By unwinding the restrictive rules introduced by the former
Government in 2009, the legislation introduces wider tax
concessions for share and option schemes, which aim to make the
schemes more internationally competitive and supportive of
start-ups in Australia.
The proposed changes are a welcome relief to the cumbersome tax
rules currently in place, and we envisage that a much bigger update
of option schemes, particularly by the start-up sector, will
follow. This article summarises some of the key changes and their
implications for the uptake of options schemes.
ESS play an important role in increasing employee attraction
rates, talent retention and employee motivation. This is
particularly true for start-ups that may not have the capital to
reward and retain talented staff.
In 2009, changes to the ESS rules meant that, as a default
position, employees were usually taxed at the point that shares
were issued, or an option was granted. This means that employees
are usually taxed before any gain or benefit is realised, despite,
in many cases (especially in the case of start-ups), the facts that
no financial gain or benefit will ever be realised and the shares
are unable to be traded. Additionally, to the extent that the
taxing point is able to be deferred, the taxing point is the
vesting date, rather than the date of exercise.
This has had a significant impact on the uptake of ESS. Research
has shown that since 2009, the number of Australian companies
offering ESS has dropped dramatically, with one of the principal
reasons cited being the complex administrative burdens and
unfavourable tax treatment. The draft legislation aims to address
Draft legislation – what are the key changes?
The draft legislation can be broken into two parts. The first
deals with start-ups, while the second deals with all
Key amendments under the draft legislation include that:
the taxing point of an ESS interest, which is a
"right" (for example, an option, a performance right or
other right to acquire shares), may be deferred even if the ESS
does not provide for a "real risk of forfeiture" in
respect of the right
a deferred taxing point of ESS rights is extended from when the
right becomes exercisable under the ESS, to when it is actually
exercised by the employee (provided certain other requirements are
the maximum deferral period (for both shares and rights) is
increased from seven to 15 years
the significant ownership and voting rights limitation will be
relaxed from five to 10 per cent of the effective ownership or
maximum voting rights of the employer
the Commissioner may approve safe harbour valuation
methodologies that are binding on the Commissioner, and
a further tax concession is introduced for employees of certain
start-up companies so that:
for shares issued at a discount of less than 15%, the discount
on issue is exempt from income tax, or
for rights that have an exercise price that is greater than or
equal to the market value of an ordinary share in the company at
the time the right is acquired, the discount is deferred until
exercise or sale under capital gains tax rules.
To access the concessions, shares or rights must satisfy the
general conditions that apply to all ESS concessions. The ESS must
also operate so that all employees hold the ESS interest for at
least three years. Additionally, for the tax concession to apply
the company must:
have an aggregate turnover of less than $50 million
be unlisted, and
have been incorporated for less than 10 years.
What does this mean?
The changes are a welcome relief to the cumbersome rules
currently in place and we envisage that a much bigger update of
option schemes, particularly by the start-up sector, will follow.
However, loan plans, which have been the scheme of choice for
private companies since 2009, will still remain popular due to the
ability for the employee to hold his/her shares on capital account
from the date of grant (assuming the shares are issued at market
The closing date for written submissions about the draft
legislation is Friday 6 February 2015. It is proposed that the
legislation will apply to ESOP interests acquired on or after 1
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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Australian employees receive certain entitlements (such as annual leave and superannuation) where contractors do not.
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