Recently the Australian Government released a policy statement entitled ‘Industry Innovation and Competitive Agenda.’ The Agenda includes a proposal to reverse the previous Labour Government’s changes to the way in which employee share schemes (ESS) are taxed. The changes will be welcomed by businesses in particular start up companies.
How are ESS currently taxed?
In 2009, changes were made to how ESS are taxed. Currently, securities purchased under an ESS are taxed up-front to the extent employees receive a discount relative to the market value of the securities.
Shares provided under an ESS are currently taxed up-front (when provided to the employee) unless there is a risk that the employee will forfeit the shares, in which case taxation is deferred until the shares ‘vest.’
Options provided under an ESS are generally taxed when they ‘vest’, rather than when the employee decides to exercise the options to purchase shares in the company, as was previously the case. The tax treatment of options is particularly problematic because it taxes employees before they have the opportunity to convert their options to shares and realise any actual gain by selling the underlying shares.
What changes are proposed?
- The Government is proposing to reverse the 2009 changes so that options are taxed when exercised by employees (converted to shares) rather than when the employee receives the shares.
- Eligible start up companies will be able to offer securities under an ESS to employees at a discount with taxation being deferred and in some cases an exemption from taxation. In addition, the maximum time for deferral will be extended from seven years to 15 years.
- In order to be eligible to participate in the scheme the start up company must be unlisted, have revenue of not more than $50 million and be incorporated for less than 10 years. The proposals will enable start-ups to provide options to attract and retain key talent.
- The Government will also update the ‘safe harbour’ valuation tables, which are used by companies to value their options, so they reflect current market conditions.
- The integrity provisions introduced in 2009 and the $1,000 up-front tax concession for employees who earn less than $180,000 per year will be retained.
- Employees share options will still be taxed as income rather than at the lower capital gain rate, which is currently achievable under some options plans.
When are the changes expected to be implemented?
It is expected that the Government will consult with the industry before legislation is introduced on 1 July 2015.
Please contact me should you have any questions on Employee share schemes.