Australia: Australian Tax Update: Parliament Passes Employee Share Scheme Laws

Last Updated: 7 December 2009
Article by Gerry Bean


The legislation for implementing the new employee share scheme rules has just passed both the House of Representatives and the Senate, and only awaits Royal Assent.

Parliament passes employee share scheme laws

The legislation will apply to all shares or rights provided to employees, directors and certain contractors from 1 July 2009. Transitional arrangements may apply to schemes where shares or rights were granted prior to 1 July 2009.

Consultation is ongoing with the Board of Taxation regarding certain aspects of the taxation arrangements, including issues regarding the determination of market values, and whether there should be different rules for 'start-up' companies.

Many employers may now be able to implement share plans which had been put 'on ice' due to the uncertainty.

Rules applying from 1 July 2009

The rules apply to both shares and rights (or options) to acquire shares which are issued in respect of employment.

The rules will now also apply to arrangements under which there is a right which later becomes a right to acquire shares. A common example would be a right to acquire either shares or equivalent cash at the option of the employer ('hybrid schemes'). If, after the scheme commences the employer elects to provide shares (rather than cash), the scheme is treated as if it was always an employee rights scheme from the date of grant (and prior income tax returns may need to be amended). If cash is ultimately provided, it will be treated as a cash scheme, which would usually be taxed only when received.

Assessable income arising under employee share schemes will be taxed at the employee's marginal tax rate (up to 46.5%).

Up Front Taxation

The basic rule is that the discount given (value of the share/right less the consideration paid) will be taxed at the time the share/right is granted. Rules for determining the value of the shares/rights are currently being considered by the Board of Taxation, with temporary rules contained in the Regulations.

Employees will be able to claim a $1,000 exemption if the following strict requirements are met:

  • The employee's taxable income (including reportable benefits, superannuation and ignoring net investment losses) must be equal to or less than $180,000.
  • The employee is employed by the company or a subsidiary of the company at the time they acquire the shares/rights.
  • The shares provided must be ordinary shares in the employer (or holding company).
  • The predominant business of the company is not the acquisition, sale or holding of shares, securities or other investments.
  • There must be restrictions on selling the shares for three years (or until employment ceases).
  • There must be no risk of forfeiting the shares.
  • The scheme must be available to at least 75% of long term permanent employees on a non-discriminatory basis.
  • Immediately after the employee acquires the share/ right, the employee must not hold a beneficial interest in more than 5% of the shares in the company or be in a position to cast or to control the casting of, more than 5% of the maximum number of votes that might be cast at a general meeting of the company.

Deferral of Taxing Point

The taxing point will be deferred in the following limited circumstances:

  • There must be a genuine risk of forfeiture of the shares/ rights at the time they are granted. There will commonly be a genuine risk of forfeiture if there are genuine performance hurdles or where the shares/rights are subject to forfeiture on termination of employment.
  • The employee is employed by the company or a subsidiary of the company at the time they acquire the shares/rights.
  • The shares to be acquired must be ordinary shares in the employer (or holding company).
  • The predominant business of the company is not the acquisition, sale or holding of shares, securities or other investments.
  • Immediately after the employee acquires the share/ right, the employee must not hold a beneficial interest in more than 5% of the shares in the company or be in a position to cast or to control the casting of, more than 5% of the maximum number of votes that might be cast at a general meeting of the company.
  • For share schemes (not rights), at least 75% of long term permanent employees must be able to acquire shares under the scheme or another scheme.
  • Certain salary sacrifice arrangements for shares will also qualify for deferral if the market value of the shares is less than $5,000. These schemes will need to be specifically tailored to meet the new requirements.

If the above conditions are satisfied, tax will be deferred until the earlier of:

  • The ceasing of employment.
  • Seven years from the granting of the shares/rights.
  • When forfeiture conditions and restrictions on sale are lifted.

The taxable amount will be based on the market value of the shares/rights less its cost base at the deferred taxing point.

Capital Gains Tax

If the shares/rights are sold more than 30 days after the taxing point, capital gains tax will apply to tax the difference between the sale proceeds, and the amount previously taxable under the employee share scheme rules.

If the shares/rights are held more than 12 months after the taxing point, a 50% discount may be available under the capital gains tax legislation to reduce the assessable capital gain by half. This would reduce the top effective tax rate to 23.25% of the capital gain.

Reporting Requirements

Employers will be required to provide reports to the Australian Tax Office with details of shares or rights issued, as well as details of the market value of shares or rights at their taxing point.

Employers will be required to deduct tax only where an employee has failed to supply tax file number details to the employer.

Other Issues

Employees will be able to amend their tax return and get a refund of tax previously paid if a share or right is subsequently lost or forfeited due to the operation of the scheme. However, refunds will not be available if the loss is due to a choice made by the employee, or a condition of the scheme to protect against a fall in value. For example, if a right is forfeited because of a term of the scheme, a refund may be available for any tax previously paid. However, if an employee chooses not to exercise an option due to a decline in market value, the refund will not be available.

The use of appropriately structured 'hybrid' schemes may provide some protection to employees where there is a decline in the value of underlying shares, but such schemes may be more complex, and may necessitate amendment of previous tax returns.

The new rules will cover directors, office holders and independent contractors as well as employees.

Transitional Arrangements

Transitional rules attempt to maintain the previous tax rules for shares or rights issued before 1 July 2009. Where shares or rights were granted under the old law, but tax was deferred until after 1 July 2009, those shares or rights will be treated as 'transitioned shares or rights' and will be brought within the new rules. The original taxing point will remain, and potential eligibility for refunds (eg for forfeited rights) will remain. However, the valuation rules and reporting requirements of the new legislation will apply.


Now the legislation has been passed, companies are able to plan for appropriately structured employee incentive schemes.

Employers considering new schemes may be able to structure the schemes to give companies flexibility in determining the taxing point, and the value which is taxed. Companies may consider having a number of schemes giving different taxing points. Schemes which would usually be taxed 'up front' could consider the use of 'hybrid' schemes involving rights to either shares or cash to give further flexibility (particularly in the event of a decline in value of shares). However, such schemes may be more complex for the employer and employee.

Some uncertainty still exists surrounding the final valuation rules, and treatment of 'start-up' companies. However, temporary rights valuation rules contained in the regulations may be sufficient for companies to move forward with their share schemes.

Employers with existing schemes in Australia should review their plans to determine the impact of the new rules on their employees, and whether further disclosure is needed. The reporting requirements may impact on existing schemes.

© DLA Phillips Fox

DLA Phillips Fox is one of the largest legal firms in Australasia and a member of DLA Piper Group, an alliance of independent legal practices. It is a separate and distinct legal entity. For more information visit

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.

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