ESS Tax Changes Passed

The Australian Senate passed changes to the taxation of employee share schemes (ESS) on 25 June with no amendments.

Board Governance

The Tax and Superannuation Laws Amendment (Employee Share Schemes) Bill 2015 will be effective for grants made from 1 July 2015 once the legislation receives royal assent.

For all companies, changes include:

  • Rights (including options) that are eligible for deferred taxation will now be taxed at exercise rather than when when a real risk of forfeiture is lifted. Cessation of employment remains a taxation point.
  • The maximum tax deferral period rises from 7 to 15 years.
  • The maximum interest (or rights to own interest) an employee can hold in an organisation and still participate in a deferred taxation scheme increases from 5% to 10%.
  • New statutory valuation tables introduce lower valuations for options
  • Refunds can now be obtained where an employee has paid tax on options but elects not to exercise them.
  • The taxation treatment of equity deemed to have a nil value at grant has been clarified.

For start-ups, changes include:

  • Eligible rights (including options) or shares will not be subject to tax on grant, vesting or exercise. Instead, they will be subject to capital gains tax, generally when the shares are sold. Shares can be issued at a discount of up to 15% to the market price, while options must have an exercise price of no less than the market price of shares at grant.
  • The time employees hold options will be taken into account for capital gains tax purposes when the employee sells the shares upon exercise.

In order to be eligible for the start-up concession, employees must hold rights or shares for a minimum of three years and start-ups cannot be incorporated for more than ten years, be listed or have aggregate turnover higher than AU$50 million.

The passing of the Bill follows a positive report from the Senate Economics Legislation committee. The Committee examined a number of issues raised by submissions on the legislation (summarised in our recent article here) and concluded that the reform constituted a significant improvement in the taxation of ESSs.

The changes may see an increase of the use of options in ESSs due to the lower valuations in the statutory tables and what may be considered a more favourable taxation point.

They may also lead to companies offering an exercise period on performance rights so that employees can elect when they exercise the rights and are therefore taxed.

There could potentially also be an increase in the use of performance rights as a component of fixed remuneration or annual bonus deferral.