In our Alert on 30 September 2014, we noted that the Federal Government appeared set to announce changes to the way the Employee Share and Option Scheme (ESOP) rules applied to "start up" companies as part of its "Competitiveness Agenda". On 14 October 2014 the Government announced that it will, effective from 1 July 2015, introduce long-awaited changes to the way employee share options are taxed.

In this Alert, Special Counsel Justin Byrne, Senior Associate Alex Davies and Solicitor Rachael Nyst discuss these changes and how they are intended to better align the interests of employers and their employees, and to stimulate the growth of start-up businesses in Australia. No draft legislation has yet been released.

Key points:

  • The re-introduction of tax breaks for ESOP's has lifted start-up companies, which have publicly criticised the controversial changes made by the Labor government in 2009.
  • The Government will reverse the 2009 changes to the taxing point for options for all companies. This means that where options are provided, the taxing point will be deferred until the exercise of the option, rather than the grant of the option. This will remove issues associated with options being taxed in employee hands upon grant, even where the options are not "in the money". This will be a welcome change.
  • The $1,000 upfront tax concession for workers who earn less than $180,000 per annum will be retained.
  • The way in which unlisted options are valued at the taxing point will also be clarified in order to provide certainty.
  • The maximum time for tax deferral will also be extended from seven to 15 years, in a move designed to give start-up companies more time to be competitive and succeed.
  • Eligible start up companies will be able to provide their employees with options or shares at a small discount that will not be subject to up-front tax, as long as the employee holds the shares or options for at least three years. Instead, provided certain conditions are met, options will have taxation deferred until sale and shares that are issued at a small discount will have that discount exempt from tax.
  • Eligible start up companies will include companies which are unlisted, have been incorporated for less than 10 years and have a turnover of not more than $50 million.

These new, workable employee share scheme tax laws will see better, more flexible remuneration packages offered in start-up companies. The flow on effect of this is that ultimately, they will be able to access and retain staff of a higher calibre for longer periods of time.

Additionally, these entities will now be able to more effectively retain existing cash levels for development of the key business whilst incentivising staff and aligning their interests with those of shareholders.

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