Employee Share Schemes
The Government has recently released draft legislation which will improve the tax treatment of Employee Share Schemes (ESS) to facilitate better alignment of interests between employers and employees, and to stimulate the growth of high-technology start-up companies by making them more competitive in the labour market.
The key reforms of the ESS tax law include:
- the right to acquire shares and any options being taxable when the employee actually exercises his or her right, instead of the date at which the right can be exercised;
- the opportunity to defer taxation of ESS rights if employees are granted ESS rights that are not subject to a real risk of forfeiture. This is provided that they are subject to a restriction on disposal and the governing rules for the ESS explicitly provide a deferral of tax on these rights;
- the deferment of tax on ESS shares or rights being extended from 7 to 15 years;
- in order to access the ESS concessions and be eligible for taxation deferment, the employee cannot have more than 10% ownership interest or voting power in the company. In order to determine whether this 10% limit has been exceeded, the employee would need to account for the number of converted shares should the rights be exercised;
- the opportunity for employees to be eligible for a tax refund on discounted ESS rights that have been taxed prior and subsequently lapse or not exercised;
- new tax concessions for qualifying start-ups (turnover of no more than $50 million, unlisted and incorporated for less than 10 years) in the form of:
- income tax discounts of up to 15% on grants of shares; and
- capital gains tax (CGT) rules applying for options that are granted with an exercise price no less than the market value of the share at grant date;
- changes to the safe harbour valuation tables contained in taxation regulations for unlisted rights, to reflect current market conditions and provide a more detailed explanation to the assumptions underlying the table. If the legislation passes, the revised table will result in lower values than existing tables; and
- the newly appointed power provided to the Commissioner of Taxation to conditionally approve market valuation methodologies to determine the market value of an ESS interest (including all assets and/or non-cash benefits).
The changes are expected to roll back existing laws that prevented start-ups from using ESS to attract employees. However, whilst ESS will be more attractive, both start-ups and non-startups will still need to ensure that no unfair scenario for employees arises and careful design and implementation of ESS is required.