In 2009, the Australian Government at the time, introduced legislation revising the taxation of Employee Share Acquisition Schemes in Australia. The basic principle of the both the current and former rules is to tax any discount given in relation to shares or rights acquired by an employee under an Employee Share Scheme. Broadly, the discount represents the difference between the market value of a share or right and the consideration paid to acquire it.
By default, both rules result in taxation of the discount in the year that the interest is acquired, however, prior to 2009, it was possible (and relatively easy) to defer the taxation of this discount until the earlier of:
- When the share/right was disposed of;
- When there are no restrictions on the exercising of the right;
- When the employment in respect of which the share/right was acquired ceases;
- When there are no restrictions on the disposal of the share/right; or
- 10 years from the date of acquisition of the share/right.
Since the revised legislation took effect in 2009, the rules were tightened such that there must be a ‘real risk’, under the conditions of the Employee Share Scheme, that the interest could be forfeited or lost in order to defer the taxation of any discount.
As a result of the 2009 legislation, Employee Share Schemes lost popularity as in many instances, employees would be required to pay tax in the year of receipt of the shares/rights without having the ability to be able to sell any portion of their shares/rights to fund the cost of their tax liability.
The current Australian Government has announced that they are intending to revoke the existing rules and are considering allowing employees to be taxed once the shares are sold. It is likely that any changes to the legislation will be subject to eligibility rules (excluding some higher income earners and large corporations from participating). The changes will be welcomed by start-ups seeking to provide an equity incentive for employees contributing to the early growth of the business.
If your clients have a presence in Australia and are seeking to incentivise Australian employees with equity, please contact Murray Howlett on 07 3023 1300 to discuss what benefits the announced changes could have on their business.