Eyes on Employee Share Scheme Rules

The Federal Government has indicated to media outlets that it will revoke unpopular 2009 changes to employee share scheme law.

Federal Government

Under the current rules, any discount on the market value of an interest in a share or right is typically taxed in the income year of acquisition, which in the case of a right or an option may not be when the value of the instrument is realised. Some industry representatives and politicians have claimed this is akin to “paying tax on the winnings of the lotto ticket before you win the lotto”.

Along with revoking the 2009 changes, Small Business Minister Bruce Billson has also reportedly indicated that the government is considering adopting elements of the UK government’s Sharesave scheme.

Under the Sharesave scheme, employees agree to have regular savings of between £5 and £250 a month taken from their salary for three or five years. At the end of the specified period, they are given an option to buy shares with the accumulated savings for a fixed exercise price. The exercise price cannot be less than 80% of the market value of the share at the start of the savings period. The employees also receive a bonus from their employer at the end of the savings period. Employees do not have to exercise the options. If they do not, they are provided with the proceeds of the savings.

Both the interest the savings earned and the bonus is tax free, whether or not the options are exercised. In addition, there is a taxing point advantage.

Outside of the Sharesave scheme, UK employees may pay tax when they:

  • receive the share option;
  • exercise the share option; or
  • benefit in any other way from the share option, for example receiving something in return for giving it up.

Under the Sharesave scheme employees are not taxed when

  • they receive the share option; or
  • in most circumstances, when the option is exercised to buy shares.

This is because they don’t pay income tax on the difference between what is paid for the shares and what they are worth. When shares are sold, capital gains tax may be incurred, but employees can avoid or reduce this through putting the shares into a pension scheme or using their annual exempt amount of £10,900 per individual.

Whatever scheme the Australian Government adopts, Minister Billson indicated it will likely be governed by eligibility criteria relating to factors such as employer size and taxpayer income. The changes are due to be announced soon under the government’s National Industry Investment and Competitiveness Agenda.

The former Labor Government had announced a review of employee share schemes and released a discussion paper in August 2013 that raised a number of options including:

  • retaining the current arrangements;
  • deferring taxing point or payment of tax;
  • taxing start-up share schemes at a lower rate; and
  • increasing the up-front discount for share schemes.

After the election, the issue was bundled into the Prime Minister’s Taskforce established to develop a National Industry Investment and Competitiveness Agenda which was due to make a recommendation by mid 2014.

The technology industry was, however, not happy with the pace of the reform, attacking the government for waiting to act. The media push coincided with the release of a report by the Employee Ownership Australia and New Zealand (EOA), Link Market Services and Computershare, which found that a reversal of the 2009 changes to salary sacrifice plans and option plans could increase tax revenue by over $215 million a year.

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