The Federal Government has recently proposed two critical changes to the employee share scheme tax provisions as part of its Industry Innovation and Competitiveness Agenda.
Firstly, the Government will reverse the changes made in 2009 to the taxing point for options. This change will apply to all companies and will mean that discounted options are generally taxed when they are exercised (converted to shares), rather than when the employee receives the options.
Secondly, to encourage entrepreneurship and innovation, unlisted businesses with a turnover of less than $50 million that have been incorporated for less than 10 years will be able to provide employee share options and shares at a small discount (likely up to 15%) that will not be subject to up-front tax.
The taxing point on options will be extended from 7 years to potentially 15 years from grant. Under certain conditions, the taxing point will be deferred until sale of the underlying shares. Shares will have the discount exempt from tax. Eligible employees who are granted options or shares will be required to hold them for at least three years.
The government is also proposing to update the ‘safe harbour’ valuation tables used by companies to value their options so that they reflect current market conditions.
Whilst further details will no doubt be released in due course, the following issues potentially arise:
- Will the proposed update to the ‘safe harbour’ valuation tables result in higher taxable values? How do ‘current market conditions’ differ from the assumptions adopted in the current tables?
- How will executives respond to CGT concessions no longer being available on capital growth between vesting and exercise of options?
- Would the new rules apply to zero-exercise-price options? What about performance rights without an exercise mechanism?
- Is there a cap on the maximum dollar value of the exempt discount?
- Does the three-year holding period apply for the options as well as the shares issued or transferred on exercise of the options?
- What are the implications of the holding period not being satisfied (including in the case of terminations)?
- What are the tax implications (if any) to participating employees should an eligible unlisted company undertake an IPO during the 10-year tax deferral period?
- Do eligible employees have to opt in to the ‘start-up’ provisions? Can they subsequently ‘elect out’ of such provisions (bring forward the relevant taxing point)?
- Can employees elect to be taxed upfront on discounted options?
The above changes are proposed to commence on 1 July 2015.