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25 Mar 15 Taxation of employee share schemes - amending Bill

On 25 March 2015 the Minister for Small Business introduced into Parliament the Tax and Superannuation Laws Amendment (Employee Share Schemes) Bill 2015.

The Bill will amend the taxation of employee share schemes (ESSs) provisions of the Income Tax Assessment Act 1997 (Cth) by:

  • reversing some of the changes made in 2009 to the taxing point for rights for employees of all corporate tax entities
  • introducing a further taxation concession for employees of certain small start-up companies, and
  • supporting the ATO to work with industry to develop and approve safe harbour valuation methods and standardised documentation that will streamline the process of establishing and maintaining an ESS.

This measure was announced in the Industry Innovation and Competitiveness Agenda released on 14 October 2014.

The amendments made by this Bill will generally apply to ESS interests acquired on or after 1 July 2015.

Reversing and improving certain parts of the 2009 reforms

Currently, where an ESS right is subject to deferred taxation, the taxing point occurs at the earliest of one of the following times:

  • when the employee ceases the employment in respect of which they acquired the right
  • seven years after the employee acquired the right
  • when there are no longer any genuine restrictions on the disposal of the right (for example, being sold), and there is no real risk of the employee forfeiting the right, or
  • when there are no longer any genuine restrictions on the exercise of the right, or resulting share being disposed of (such as by sale), and there is no real risk of the employee forfeiting the right or underlying share.

The Bill will amend the second and fourth of those taxing points so that the taxing point occurs at the earliest of one of the following times:

  • when the employee ceases the employment in respect of which he or she acquired the right
  • fifteen years after the employee acquired the right
  • when there are no longer any genuine restrictions on the disposal of the right (for example, being sold), and there is no real risk of the employee forfeiting the right, or
  • when the right is exercised and there is no real risk of the employee forfeiting the resulting share and there is no genuine restriction on the disposal of the resulting share (if such risks or restrictions exist, the taxing point is delayed until they lift).

The Bill will allow rights schemes which do not contain a real risk of forfeiture to access tax deferred treatment where the scheme rules state that tax deferred treatment applies to the scheme and the scheme genuinely restricts an employee from immediately disposing of the right.

The Bill will make a number of additional refinements and improvements to the 2009 reforms, including by extending the maximum deferral period for shares received under an ESS, making changes to the maximum ownership and voting rights limitations and changing the rules relating to the refund of income tax on forfeited shares or rights rules.

Small start-up companies

Employees of certain small start-up companies will receive further concessions when acquiring certain shares or rights in their employer or a holding company of their employer. These further concessions are an income tax exemption for the discount received on certain shares and the deferral of the income tax on the discount received on certain rights which are instead taxed under the capital gains tax rules.

Reducing compliance costs

The Bill will support the ATO to work with industry to develop and approve safe harbour valuation methods to improve certainty and reduce compliance costs in maintaining an ESS.

The Bill does this by introducing a new power for the Commissioner to approve market valuation methodologies. Approved methodologies will be binding on the Commissioner but the taxpayer will remain able to choose another methodology if he or she believes the alternate methodology is more appropriate in the circumstances.

The ATO will also work with industry and the Australian Securities and Investments Commission (ASIC) to develop standardised documentation that will streamline the process of establishing and maintaining an ESS. The standard documentation will be issued under the Commissioner’s general powers of administration.


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