Employee Share Schemes – Back to the Future?

Dinosaur Grey

Employee Share Schemes – Back to the Future?


As you may be aware, the government announced that it was reforming certain aspects of the tax treatment of employee share schemes (ESS) from 1 July 2015.  There were a number of drivers behind the change including increasing entrepreneurship and reversing some of the changes implemented in 2009 – essentially we are going back to the future!


The draft legislation released on 14 January 2015 provides some significant changes in the law, and specifically in relation to the taxing point for ESS interests.  In ESS income tax deferred schemes, the proposed amendments would make the taxing point the earliest of: 

ESS Table 8


In addition, employees of certain small start-up companies (unlisted, less than 10 years old and aggregated turnover of less than $50m) receive further concessions on ESS interests (shares or rights) in their employer or a holding company of their employer. The concessions are essentially twofold:

  • The discount received on certain shares is exempt from income tax; and
  • The deferral of the income tax on the discount received on certain rights which are instead taxed under the CGT rules.


These represent a significant movement and expression of desire by the government to encourage ESS to be utilised and to encourage entrepreneurship by way of making sweat equity a more attractive way of rewarding employees.


Other proposed changes include:

  • The significant ownership and voting rights threshold being increased from 5% to 10%.
  • Taxation of all ESS rights is to be deferred even if these rights schemes do not contain a real risk of forfeiture.
  • An employee that never exercised its ESS right, where the discount was taxed upfront, will be entitled to a refund of income tax paid subject to certain conditions.
  • New valuation tables are to be introduced to replace the existing tables updating the safe harbour option valuation tables to reflect current market conditions.


The proposed amendments would apply on or after 1 July 2015 with the current law continuing to apply to ESS interests acquired before 1 July 2015.


Should you have any queries on the above or on how the new rules would affect your current ESS or proposed ESS please contact your relevant ESV engagement partner on 9283 1666.

Article by David Prichard