Employee Share Scheme (ESS) Taxing Provisions to be Amended at Last

On 14 October 2014 the Government announced proposed changes to the ESS taxing provisions that will come into effect on 1 July 2015. The proposed changes fall into two broad categories being those that apply to:
• start-up companies which will be unlisted companies that have been incorporated for less than 10 years and have turnover of not more than $50 million, and
• other companies including ASX listed companies.
The start-up concession will apply to options and allow tax deferral for up to 15 years (currently 7 years) and will tax any benefits as capital gains when the shares are sold. Similar provisions may apply to offers of shares.
For other companies the ESS provisions will enable ESSs to be classified as either up front taxed or tax deferred depending upon the rules of the plan. If tax deferral applies then options may be taxed at the time of exercise (currently when any real risk of forfeiture and dealing restrictions cease to apply) and the benefit taxed will be the excess of the market value of a share over the exercise price and any other amounts paid in relation to the option. This change seems likely to overcome the current problems where an option holder may be taxed before exercise on a value that cannot be realised because the exercise price in not less than the market value of a share. This change may re-open the door for options to be used for long term incentive purposes.
The current regulations that may be used to value unlisted shares and rights are also to be updated.

You can read more from the official release here:

http://www.dpmc.gov.au/publications/Industry_Innovation_and_Competitiveness_Agenda/employee_share_schemes.cfm

Department of the Prime Minister and Cabinet

ATO Draft Public Ruling on Use of Employee Remuneration Trusts (Including Employee Share Trusts for LTI Plans)

On 5 March 2014 the Australian Taxation Office (ATO) released a draft Tax Ruling for public comment.  Its focus is on employee remuneration trust arrangements and represents a significant change of attitude to some well accepted practices.  .  The affected trust arrangements potentially include employee share trusts that have long been used in relation to executive long term incentive plans.  They facilitate a tax deduction for the company and enforcement of dealing restrictions. 

At first reading the focus seems to be on plans that were designed to gain other benefits for companies or employees.  Any employee share schemes involving trusts particularly those where loans are provided by the trustee or assets are being accumulated prior to benefits being provided to employees should be reviewed in relation to the draft Tax Ruling.  The trust arrangement that GRG has implemented for many clients seem to be fall within acceptable practice under the new approach by the ATO.

The Tax Ruling when finalised will be implemented on a retrospective basis except for companies that have current private binding tax rulings where compliance with the new ATO approach is expected from 5 March 2014.  Thus it may be prudent to suspend further use of trusts until the Tax Ruling is finalised and your company’s specific circumstances can be reviewed.   

GRG Submission on Draft Revised ESS Taxing Provisions

In January GRG prepared a submission to the Treasury in response to the draft revisions to the employee share scheme (ESS) taxing provisions. These revisions are intended to make it easier for start-ups to use options as a means of remunerating and incentivising employees, among other things. GRG supports the intent however argues for broader reform and that the changes should not be restricted to start-up, not least of all because this will be difficult to to define and regulate in a manner that is both practical and supportive of the intention of reforms.

As part of the submission GRG has proposed an alternative approach to ESS taxation that we believe will meet the expectations of stakeholders and simplify taxation for everyone.

Our submission can be found at the following link:

http://www.godfreyremuneration.com/documents/140128_ESS_Tax_Submission.pdf