Employee Share Schemes - Proposals to defer the taxing point of the discount

What happened?

According to a recent Government press release[1], the Government plans to change the tax treatment of employee share schemes to assist companies in general and certain eligible start-up companies to attract and retain high-quality staff.

In short, the Government believes that by changing the taxing point of the discount on certain shares and options acquired under an employee share scheme (i.e. by deferring it), entrepreneurship will be boosted whereby more companies can reward their employees through non-cash incentives.

New legislation effecting these proposals is due to apply from 1 July 2015.

 

What does this mean for you?

As you may be aware, many employer companies offer shares or options at a discount (i.e. issued for a cost lower than market value) to employees as part of an employee share scheme.

Currently, such a discount can either be taxed upfront[2] (i.e. on issue) or when the option is exercised or share is sold (i.e. deferred to a later time), depending on certain conditions[3].

The problem with upfront taxation is that this may lead to cash-flow issues for the employee (i.e. no money to pay the tax) – as compared to if the employee is only taxed at a later stage when the share is sold or option exercised (i.e. proceeds of share sale can be used to pay the tax).

Seeing this as a problem that inhibits start-up companies, the Government intends to defer the taxing point of the discount as follows:

1.      For all options issued under an employee share scheme by any company

It is proposed that such a deferral should be possible by changing the law as it currently stands to generally tax these options only once they are exercised (unfortunately the press release does not contain any more specifics).

2.      For options or shares issued under an employee share scheme by eligible start-up companies

It is proposed that an automatic deferral of the discount should be available for employees that have held such shares or options for at least 3 years in an eligible start-up company (i.e. an unlisted company that has been incorporated for less than 10 years and that has an aggregated turnover of $50 million or less). In cases where the discount is “small” (not defined in the press release) the discount will not be taxed (i.e. it will be exempt).

Other proposed changes include:

1.      To extend the maximum time for tax deferral from 7 years to 15 years; and

2.     To update the “safe harbour” valuation tables of options to reflect current market conditions.

 

How can we help you?

We realise that this proposal is still in its infancy (i.e. there is not even any draft legislation out yet), but given the intention is that new legislation is proposed to come into effect on 1 July 2015, we will keep you updated on any new relevant developments in this area. At this stage, we recommend a watching brief for companies making use of employee share schemes.

Please contact your KHT Adviser if you are involved with a company that have employee share schemes in place or are thinking of structuring employee share schemes and would like to know more about how these proposals may affect you.

Correspondingly, if you are affected by these proposals, we would be pleased to hear your views on this issue.

 

References:

[1] Encouraging employee share ownership and entrepreneurship, Tony Abbott & Joe Hockey, 14 October 2014

[2] Employee may qualify for a $1,000 discount under this option provided the employee earns less than $180,000 a year.

[3] The default position is to tax the discount on the option or share upfront; the discount will only be taxed at a later time (deferral) if the option or share is subject to a real risk of forfeiture (i.e. the shares or options can be forfeited or lost other than by disposal).