The Senate Economics Legislation Committee has recommended that legislation changing taxation arrangements for employee share schemes (ESS) be passed.
- Rights (including options) eligible for deferred taxation are to be taxed at exercise rather than upon vesting.
- The maximum deferral period is to be increased from seven to 15 years.
- Employees will be able to participate in deferred taxation schemes as long as they do not own more than a 10% interest (or rights to own interest) in the company (previously 5%).
- A refund is available on tax paid where employees elect not to exercise underwater options
- New valuation tables for options.
- Employee share scheme interests deemed to have a nil value at grant are treated within the employee share scheme provisions and are not subject to fringe benefits tax.
Start-ups are to receive additional concessions, enabling them to issue shares and rights at a tax-free discount of up to 15%, with the instruments subsequently subject to capital gains tax on sale using a cost base equal to market value for shares and the employee’s cost of acquisition for rights.
The time employees have hold options will be taken into account for capital gains tax purposes — they can sell the shares they obtain from exercising their options within 12 months of acquiring them and still receive the 50% capital gains tax discount.
To access the start-up concessions, companies and group companies cannot be older than ten years, listed or have aggregate turnover higher than AU$50 million. Investments by selected venture capital partnerships and early stage venture capital funds can be ignored when considering whether companies meet these criteria.
The employee must hold rights or shares for a minimum of three years, although the tax commissioner can exercise discretion to reduce the period where affected employees are forced to dispose of their rights or shares before the end of the period — for example in the case of a trade sale or IPO — as long as there was an original genuine intention for the minimum holding period to be met.
The new arrangements would apply to ESS interests granted on or after 1 July 2015.
After passing through the House of Representatives, the legislation was referred to the Senate Economics Legislation Committee, which has now released its report.
It considered a number of issues raised by submissions, including:
- Whether to broaden the definition of a “start-up” for the additional start-up concessions. The requirements that start-ups be unlisted and be incorporated for less than 10 years were two major discussion points in submissions.
- Whether cessation of employment should be removed as a taxation point, which submissions stated was inconsistent with encouraging long term ownership of shares and international practice.
- Whether to apply the new legislation to grants that have not yet incurred their taxation point as at 01 July 2015 and extend refunds for tax paid on underwater options to grants made before 1 July 2015. Submissions argued this would make the transition less complex for companies, which would otherwise have to manage grants made under three different regimes.
- Whether to change the three-year holding requirement for the start-up concessions, as they may inhibit drag-along and tag-along rights or deter exit events within three years of establishment.
- Whether the rules disproportionately benefit some taxpayers as most employees do not have access to an employee share scheme of any sort.
The Committee has stated that it is satisfied the proposed changes would help better realise the potential of employee share schemes.
“The Committee acknowledges that while most submissions supported the intent and general direction of the Bill, several feel the changes could go further still. Nonetheless, the Committee believes the proposed changes represent a significant improvement in the taxation treatment of ESSs, and is satisfied the new arrangements will be highly competitive by international standards,” it stated.
It recommended that the Senate passes the Bill.