Employee Share Schemes
How Far Are They Moving The Goal Posts?
It was widely felt that the changes proposed by the Government would result in a significant reduction in the number of broad-based employee share plans and an increase in the related administrative and tax compliance complexity for employers and participants. Furthermore, it was strongly feared this would also put Australia out of step with its international competitors.
In our view, the proposed changes contained in the consultation paper would have created a number of unintended outcomes and, most importantly, potentially jeopardise the ability of businesses to offer their employees access to an employee share scheme (“ESS”) in the future.
The “Back-flip”
Since the announcements in June, following extensive consultations and lobbying from within the tax industry and big business alike, we have now seen the Government perform an almost perfect “back-flip” and abandon the majority of the proposed changes.
On 1 July 2009, the Assistant Treasurer issued a press release and policy statement setting out the Government’s “final” tax treatment of shares and rights acquired under an ESS.
The Government’s proposed amendments were significant and the announcement moves the operation of the proposed changes more closely towards the existing rules. The key elements of the Government’s proposal now include:
· $1,000 exemption threshold increased - the threshold for the availability of the $1,000 tax exemption will be increased from adjusted taxable income of more than $150,000 to more than $180,000.
· extension of deferral concession - tax deferral will be available for schemes which include a “real risk of forfeiture”. This deferral may be extended until disposal restrictions under the scheme cease. This may provide greater certainty to employees regarding their assessment time.
· salary sacrifice schemes - tax deferral will also be available for a salary sacrifice scheme for up to $5,000, even if the scheme does not have “real risk of forfeiture”.
· reporting obligations remain but reduced in scope - the reporting obligations for employers will be reduced to remove the obligation to report the market value of shares or rights provided those shares or rights are not taxed upfront, and
· cessation of employment remains a taxing point - for schemes which qualify for tax deferral a cessation of employment will continue to be a taxing point.
It was widely felt that employers and employees should welcome the amendments to the proposed changes:
| For employees
| They will now be taxed at the time when they are first able to deal with in the shares or options, rather than at a time when they may have had the potential value but could not realize that value. |
| For employers
| The difficulty will be the need to design their employee share and option plans so there is no doubt a real risk of forfeiture exists at the time the shares and options are offered to employees. |
Where To Now?
The Government has confirmed its intention to apply these new rules to shares or rights acquired from 1 July 2009. For grants made before 1 July, the existing ESS tax rules will apply.
It is also important to remember that these proposed changes are still only in a draft form and it is envisaged legislation based on the policy statement will be introduced into parliament in the spring sittings in late August.
After this time, we will have some draft legislation and can then determine the full extent of the proposed changes.
That being said, there is still a significant impact for employers, including:
* Deferral of tax is only available where the ESS meets certain conditions.
* Employers should urgently review current Australian schemes and overseas schemes where awards may be made to individuals working in Australia. If current scheme structures result in adverse tax implications for employees, employers should consider revising the scheme or implementing a new scheme.
* Ideally, new grants to Australian resident individuals and amendments to Australian share plans should be deferred until, at the earliest, draft legislation is available. Where new awards need to be made prior to the release of the draft legislation, specific advice should be sought.
Given the complexities of the proposed changes and we currently have no draft legislation to review, if your business is considering offering employees an ESS now or in the future, we recommend you seek advice from your knp representative to fully understand how the new rules may affect your ESS.