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Proposed Amendments To Taxation Of Employee Equity Schemes

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Proposed Amendments To Taxation Of Employee Equity Schemes

The Tax Laws Amendment (2009 Budget Measures No. 2) Bill 2009 and the Income Tax (TFN Withholding Tax (ESS)) Bill 2009 have been recently introduced into the House of Representatives.

The Bills have introduced a new regime and some additional limitations on the provision of employee shares and rights (an “ESS interest”). In particular the following changes have been put forward:

• Indeterminate rights of employees – under the new regime employees are awarded a subsequent, but not initial, right to acquire shares. A right to an indeterminate number of shares or a right to receive an “employment benefit” generally, which is later settled by shares, as well as plans with cash out alternatives, may fall under this category. Any rights within the new regime will be taxable from the date of the original acquisition. The Commissioner may amend an assessment for the purpose of taxing a right which later becomes an ESS interest at any time.
• Tax deferral for rights based salary sacrifice schemes is now available, however there needs to be a “real risk of forfeiture” in respect to those rights under these schemes. In order for tax deferral to be available, the salary sacrifice based arrangements continue to be capped at $5,000 being applied each year on a “per employee, per employment relationship” basis. One of the projected outcomes of this amendment may be the reduction in use of salary sacrifice schemes.
• Implications for CGT – the Bills have substantially amended the CGT provisions so that only in limited circumstances CGT may apply to trustees of employee share trusts when allocating and transferring the ESS interests.

The Bills contain a number of long-awaited clarifications and useful changes to the Exposure Draft Legislation:

• 75% “non-discriminatory” requirement may now be more easily satisfied as ithas been amended to provide that, in order to obtain deferred taxation for shares or concessional upfront taxation generally, the employee equity scheme must have been offered to at least 75% of the permanent employees of the employer who have completed at least 3 years of service with the employer.
• Takeovers and restructures have been amended to clarify that the three year minimum holding period, which is required to be satisfied in order to apply the concessional upfront taxation rules (the $1,000 exemption), will be taken to be satisfied where shares are acquired under a takeover or restructure.
• TFN declaration given by an employee to an employer would now authorise the employer to inform the provider of the ESS interest of the employee’s TFN.
• Other useful clarifications/confirmations:

• an employee equity scheme only exists where shares or rights are provided in relation to an employee’s employment;
• the 30-day rule may be ignored in determining the point at which the reporting obligation arises for ESS interests on which tax is deferred; and
• the deferral of a tax deduction for the funding of an employee equity scheme is subject to provision of the relevant funding before the acquisition of shares in question.

A number of important issues in respect of the new regime still remain unclear:

• The Bills do not clarify what circumstances would amount to a “real risk of forfeiture” in the tax deferral provisions addressed above. Also, it is not clear how the provisions dealing with the extent of tax deferral for shares and rights will be applied.
• The Bills confirm that a choice to cease employment does not amount to a choice not to exercise the options. However, a refund would not be available where options lapse because a holder chooses not to exercise them.

It is possible that further amendments will be made to taxation of employee equity schemes legislation during its passage in Parliament. Amendments may also be made following the enactment of this legislation as the full breadth of the consequences becomes apparent.

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