Employee Share Schemes – the Changes that we had to have!
The Government has announced the long awaited reforms to the tax treatment of Employee Share Schemes (ESS), with new rules proposed to apply from 1 July 2015.
Under the current ESS rules introduced in 2009, employees have been forced to fund tax liabilities upfront in many circumstances. As a result the use of ESS has been significantly scaled back by all companies.
The employer reporting provisions and the $1,000 up-front tax concession for employees who earn less than $180,000 per year introduced in 2009 are intended to be retained.
The announced changes will operate on essentially two levels, for all companies and for certain eligible start up companies.
The changes announced in respect of the taxing point for options (for all companies) will result in any discount generally being taxed when the options are converted to shares. This differs significantly to the current rules in which the taxing point generally arises when an employee receives the options.
The main focus of the announcement relates to “eligible start up companies”. Being an eligible company confers ESS concessions and will be determined by application of certain criteria, including a maximum turnover threshold ($50m), the company being unlisted and being incorporated for less than 10 years.
Where shares or options issued at a small discount in eligible start-up companies are held by the employee for at least three years the discount will not be subject to up-front taxation. Additional concessions (subject to criteria) deferring the taxing point of options until sale and an exemption from tax for the small discount on shares were also flagged. The deferral limit for start ups will also be changed from 7 to 15 years.
Currently, legislation provides some ‘safe harbour’ valuation tables, which can be used by certain companies to value unlisted options. As part of the announcement, it has been recognised that these tables need to be amended to reflect current market conditions with the existing tables reflecting pre GFC market conditions.
As the devil is always in the detail careful drafting will need to be undertaken to ensure that the announcements outlined above are delivered by the legislation.
Should you have any questions on the announcement or your existing employee share schemes please contact your relevant ESV engagement partner on 9283 1666.
Article by David Prichard