From 1 July 2015, changes to employee share schemes (ESS) will affect the taxation of many startups, unlisted companies and businesses. An employee share scheme is a scheme under which shares, stapled securities, or rights to acquire them (ESS interests) in a company are provided to an employee or their associate in relation to the employee’s employment.
The passing of the ESS tax legislation brings in a new chapter in the taxation of ESS. The taxation changes will apply to awards granted on or after 1 July 2015. These changes are a long time coming, with the last round of changes made in 2009. It is highly recommended that employers who implement any ESS should review their current arrangements in the lead up to their next grant cycles. It may be necessary to change their ESS awards in light of the new tax changes. Here is a list of changes for businesses to explore for awards granted on or after 1 July 2015.
Taxation of Shares and Options
Shares and options that qualify for tax concessions will not be subject to Australian tax on grant, vesting or exercise. Capital gains tax will still apply when the shares are sold, which will allow the 50% discount to apply. The ATO provides assistance on how to claim the new start-up tax concessions, including safe harbour valuation methods and required documents to lodge.
There is also a change to rights with an exercise period. Reversing the 2009 reform on bringing forward the taxing time of options from exercise to vesting, the new system will allow options to be granted on or after 1 July 2015. Employees can now hold onto options and will not be taxed until those options are exercised.
For rights with an exercise period post vesting (i.e. ZEPOs), employees are granted more flexibility to manage the taxing time on their rights. If an employee chooses to leave a company, this will be a taxing point for all tax-deferred awards in the eyes of the ATO.
Higher End Options
Due to the changes in the taxing point, premium priced options are now more attractive to the valuation tables for unlisted options, which result in lower taxable values and exemption from Fringe Benefits Tax (FBT). For example, an option with an exercise price equal to 200% of the market value of the share on grant and a maximum four-year life will be treated for tax purposes as being taxable on grant on a nil value. There is no longer a requirement to satisfy the ‘real risk of forfeiture’ test on the grant of rights if the scheme documentation is appropriately drafted.
LegalVision can assist you with ensuring your ESS documentation is correct. LegalVision has a team of great contract lawyers who can assist you. Please call our office on 1300 544 755 and our Client Care team will happily provide you with an obligation-free consultation and a fixed-fee quote.