The Federal Government has announced significant changes to the taxation of employee share and option schemes. The changes will take effect from 1 July 2015.

The key measures announced are designed to assist “start-up companies” (unlisted companies with a turnover up to $50 million) and encourage innovation.

Foreign companies will also welcome the changes as Australia’s tax rules will be more closely aligned to other OECD countries’ tax employee share schemes.

What Changes Have Been Proposed?

  1. Start-up companies can issue options to their employees without creating a tax liability for the employee until the shares are ultimately sold. The sale of the shares will be subject to capital gains tax as opposed to the current law where by the discount was taxed upfront at the employee’s marginal tax rate.
  2. Employees of start-up companies may also receive an exemption from tax on shares acquired at a discount of up to 15% of the market value of the shares (as long as the shares are held by the employee for three years).

Another measure that will apply to all companies is changes to the deferral period for taxation of options. At present the maximum deferral period is the earlier of the following:

  1. When there is no longer a real risk of forfeiture; or
  2. When the employee ceases employment; or
  3. After seven years.

Under the new rules the maximum deferral period will be the earlier of the following:

  1. When the options have been exercised; or
  2. When the employee ceases employment; or
  3. After 15 years.

The proposed changes will eliminate up-front taxation on employee shares. The current legislation, introduced by the former Government in 2009, impacted most start-ups as share equity could no longer be used as an incentive to attract talent.

Next Steps

We stress that care needs to be taken. It’s still early days and the above measures are still to be reviewed. Any changes won’t take effect until 1 July 2015. Employers should give careful consideration as to when and how they implement and/or make amendments to their employee incentive plans.

If you are considering implementing or changing a current employee incentive scheme please contact Murray Howlett of our Taxation Services Division.