Employee share schemes are an internationally recognised method of rewarding and incentivising employees. Since 2009, the taxation treatment of these arrangements has effectively killed off such schemes in Australia. The Federal Government has recently announced changes to remedy this situation. The proposed changes are expected to take effect from 1 July 2015. If implemented in their draft form, the proposed changes will make Employee Share Schemes a more effective remuneration tool for businesses. The current rules are considered too burdensome due to employees often being required to pay tax on the shares/rights they were issued without having the cash to fund the tax impost. When an employee is issued a share or right they are generally taxable on the difference between the market value of that share/right and the amount (if any) that they paid to receive it. Prior to the reforms in 2009, the employee could often defer paying this tax until the earliest of:
- The sale of the shares;
- Cessation of employment; or
- 10 years after acquisition of the shares/rights.
Due to perceptions that the deferred taxes were not being declared in the relevant later tax year the Government of 2009 tightened the rules. This was to ensure that the tax associated with the granting of the shares/rights was assessable in the year or issue (unless there was a real risk that the employee would forfeit their shares/rights). The proposed changes would make it possible to defer taxation until the earliest of:
- When there is no real risk that the employee would forfeit their shares/rights and any restrictions on their sale are lifted;
- Cessation of employment;
- 15 years after acquisition; or
- For rights, when they are exercised (even when there is no real risk forfeiture).
In addition, the current Government also proposes to allow the following:
- Shares and rights issued to employees of qualifying start-up companies to be taxed under the Capital Gains Tax rules opposed to the Employee Share Scheme rules, provided certain criteria can be satisfied;
- Concessional tax treatment for employees with up to a 10% interest in the business (opposed to 5%, which is currently the case); and
- Use of additional market valuation methodologies (subject to the Commissioner’s approval).
If you are considering implementing an Employee Share Scheme for your business and would like to find out more about how the proposed changes may affect you, please contact either Murray Howlett or Josh Meggs on (07) 3023 1300.