Australia: Tax Update: Recent Changes Affecting Employee Share And Option Plans

Last Updated: 31 March 2006

The appeal of employee share and option plans is set for a boost due to three sets of legislative changes. While many ESOPs have been negatively impacted by having to expense benefits in accordance with AASB 2 Share-based Payments Standard, the new legislation regarding ESOPs illustrates the ATO’s favourable view on the further establishment of ESOPs in Australia.

ESOPs usually provide employees with a benefit based on the difference between the market value of a share (or option) and the consideration paid by an employee (if any) to acquire it. Under certain circumstances, the benefit received by the employee up to $1,000 may be exempt from income tax. In other circumstances, employees not entitled to the $1,000 exemption can elect to be taxed upfront on the benefit, or elect to defer assessment of the benefit for up to 10 years, or until their employment with the company ceases, or until they dispose of the shares (whichever is the earliest of these ‘cessation times’).

Takeovers and restructures

It is common for an employee of a takeover target or a company seeking to restructure, to be given shares or options in the bidder to replace shares in the target. Previously, it was arguable that an employee in this situation is deemed to have disposed of the shares or options in the target company. This disposal would equate to a cessation time and lead to assessment at that time of any discount received by the employee under the ESOP.

Two legislative amendments have provided relief for employees caught in this situation. The introduction of the Tax Laws Amendment (2004 Measures No 7) Act 2005 (Cth) and Tax Laws Amendment (Loss Recoupment Rules and Other Measures) Act 2005 (Cth), enable an employee to roll over the benefit or discount received under the ESOP beyond the takeover or restructure, provided certain conditions are met:

  • The takeover or restructure would ordinarily amount to a ‘cessation time’ in the absence of these roll-over provisions (although this will be removed when the bill passes through parliament).
  • At the time of the takeover or restructure there has been no other event that would trigger a ‘cessation time’.
  • The exchange contemplated by the takeover or restructure involves the employee receiving ordinary shares (or options to acquire ordinary shares) in the bidder in replacement of existing shares (or options to acquire shares) in the target.
  • The new shares or options in the bidder can reasonably be regarded as ‘matching’ the old shares or options in the target, in that they have substantially the same attributes and equivalent value. For the shares to be ‘matching’, the shares must be subject to the same restrictions and conditions.
  • Employees must cease holding their target shares or options as a result of the takeover or restructure.
  • The employee must be employed by the bidder (or a group company of the bidder) after the takeover or restructure (but under the new bill, not for shares or options taxed upfront – see below).
  • The takeover is a 100 per cent takeover or a restructure as defined under the amending act.
  • After the takeover or restructure, the employee must not hold more than 5 per cent of the shares in the target or more than 5 per cent of the votes that can be cast at a general meeting of the target.

Interestingly, a ‘100 per cent takeover’ is defined as an arrangement that is intended to result in a company becoming a subsidiary of another company (or of a holding company or subsidiary of the other company). The use of the word ‘intention’ appears to allow some scope for the roll-over relief to apply in situations where the bidder does not immediately acquire 100 per cent of the target. The issue has not yet been addressed by the tax office, and it will be interesting to see whether roll-over relief will be permitted where less than 100 per cent of the target is acquired, even though there may have been an intention to acquire full ownership. The Explanatory Memorandum seems at odds with the ordinary interpretation of the definition, by indicating that there must be a complete takeover, rather than just an intended 100 per cent takeover.

A restructure is defined as a change in the ownership (or the structure of ownership) of a company as a result of which shares or options held in the company under an ESOP are replaced (or could be regarded as having been replaced) by shares or options in another company (or companies). According to the Explanatory Memorandum, this definition would include a demerger where the shares or options in the principal entity are cancelled in return for shares or options in the demerged company. However, it is common in demergers for employees to continue to own shares or options in the principal company, in which case the roll-over relief would not apply.

A further provision in the bill will, if passed, affect the taxation of ESOPs in the takeover or restructure context. Currently, when an employee holds an option to acquire a share, and the employee loses that option without having exercised it, the employee will be treated as not having had that option (section 139DD). This is especially relevant where an employee has elected to be taxed up-front on an option, but the options are ‘out of the money’, so the employee has paid tax on a benefit that was not actually received. In this circumstance, an employee who receives an exchange of options under a takeover or restructure could not claim they had lost their options without having exercised them.

The problem will be alleviated by proposed section 139DD(2A) which provides that, although a taxpayer who has elected to be taxed upfront will still not be considered to have lost an option on a takeover or restructure, the taxpayer can claim a refund when a subsequent option is lost. Further, at the time of claiming the refund, there will be no requirement that the employment relationship continue beyond the takeover or restructure (a condition where the taxpayer has not elected to be taxed upfront).

Inbound and outbound executives

Executive relocation can create problems for both resident and non-resident executives in relation to ESOPs. The New International Tax Arrangements (Foreignowned Branches and Other Measures) Act 2005 (Cth) seeks to align Australian treatment of discounts on shares or options acquired under ESOPs with taxation treatment of employment income.

Under the changes which became effective 26 June 2005, when an Australian resident pays tax on an employee share or right, and also pays foreign tax due to some foreign service, then that taxpayer may be entitled to either an exemption under S23AF or S23AG ITAA 1936 or foreign tax credits. Also, if an Australian resident becomes a non-resident, a deemed CGT disposal does not occur for their ESOP shares or options that are within the operation of Div 13A.

For non-residents who become Australian employees, Div 13A will apply to their existing employee shares and options. A person becomes assessable in the year in which he or she becomes an Australian employee, but may be able to defer the taxing point.

If the non-resident can, and does, elect to defer taxation under Div 13A, then the cessation time will be determined by reference to the income year in which their Australian employment began. The value of the benefit will be based on the share value at the cessation time. If the non-resident elects to have the benefit derived under an ESOP included in their assessable income in the year in which they become an Australian employee, then the discount is valued as at the acquisition time. Further, they can receive the exemption for the first $1,000 of the benefit, even if only a part of the relevant employment took place in Australia.

The changes ensure that a person will only be assessable under Division 13A for the portion of that benefit that relates to the work performed in Australia. Although there is no legislation on how to apportion the periods of Australian or foreign employment to which the benefit relates, the Explanatory Memorandum suggests an OECD-like model based on the time worked in the foreign country as a proportion of the total period of employment to which the right relates.

Despite the changes, it is important to remember that double tax treaty provisions may also apply to determine whether another country has a right to tax the benefit. Generally, such a right will arise when the employee has performed work in that country and has been present there for more than six months in a 12- month period. Another country may also have a right to tax a benefit when the employee has been present in that country for less than six months in a year but is paid by the employer’s permanent establishment (as defined in the treaty) in that country (and it can deduct the payments); or the employee is a resident of that country.

This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances and no liability will be accepted for any losses incurred by those relying solely on this publication.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.