Taxation of Employee Share Option Schemes

The government announced in the 2008?09 Budget that it would make two legislative changes to the tax treatment of shares or rights acquired under an employee share scheme (ESS)

The Assistant Treasurer has released a Policy Statement setting out the final taxation treatment of shares and rights acquired under employee share schemes, effective from 1 July 2009.

Editor: the Government first announced in the May Budget that all discounts on shares and rights provided under an employee share scheme would be assessed in the income year in which the shares and rights are acquired.

However, the Government released a watered down version of this proposal in a consultation paper, and has now made several final modifications to address some of the concerns raised during the consultation process.

Under the final framework for the employees share schemes, the upfront tax exemption will be means tested and tax deferral will only be accessible where there is a real risk that the shares or rights may be forfeited, such as due to performance hurdles or employment conditions.

The pre-budget use of cessation of employment as a taxing point will be retained and the maximum 10 year deferral period will be reduced to seven years.

• Modifications from the position announced in the consultation paper are:
  Increasing the Income tax threshold for eligibility for the upfront tax concessions to $180,000 (aligning it with the top marginal tax rate threshold).
• Providing further clarity on the meaning of 'real risk of forfeiture? (if there is a 'real risk?, employees will not be able to pay tax upfront and the scheme's governing rules must clearly distinguish these schemes from those eligible for the upfront tax exemption)
• Moving the deferred taxation point from a point at which the taxpayer will no longer have a real risk of losing the share or right to a point at which, in most cases, there is both no longer a real risk of the taxpayer losing the share (or right to a share) and no restriction (present at acquisition) preventing the taxpayer from disposing of, or exercising, the share or right
• Allowing the deferral of tax in relation to up to $5,000 worth of shares under particular salary sacrifice based employee share schemes, where there is no real risk of forfeiture
• Removing the reporting requirement for employers of report the market value of employee share scheme benefits in the year of grant, it this is not the year in which the employee is taxed
• Establishing a forward plan of consultation with industry.

As previously announced, the existing law will apply to all shares and rights acquired before 1 July 2009.

The Government will introduce the legislation during the Spring Sittings of Parliament.