The Australian Government has introduced the Tax and Superannuation Laws Amendment (Employee Share Schemes) Bill 2015 containing measures designed to ease the tax impost for employee shares schemes, to make Australia’s taxation of those interests more competitive by international standards, and to assist Australian companies to attract and retain high quality employees in the international labour market. This Bill should be passed and take effect from 1 July 2015.
What was the outcome on consultation with key stakeholders and are there any further changes from those previously announced? – Following the release of the exposure draft legislation, the government consulted key stakeholders in relation to those changes.
While the government acknowledges that a number of strong policy arguments were put forward for further changes as part of that consultative process, the government’s view is that any further changes to meet those policy issues would come at an additional cost to revenue and are not achievable in the current budget environment. In this vein, the federal government acknowledges that there were strong calls for the start-up company concessions to be extended to cover biotech and other companies (including those incorporated for more than 10 years), but has not amended the draft proposed changes to meet those calls.
As a result, in almost all respects, the content of the Bill is the same as the exposure draft legislation released in January 2015. There are, however, some key modifications to the way in which the start-up concessions may apply.
Start-up concessions – The main benefactor of the proposed changes remains as those companies that qualify for the “start-up” concessions.
In summary, where relevant conditions are met, the discount on an employee share scheme (ESS) interest (right, option or share) issued by these companies is not included in an employee’s assessable income.
*General and employer conditions – The main qualification requirements for a company to be an “eligible” start-up company for the concessions to be available are:
- the company and all group companies must not be listed;
- the company and all group companies must be less than 10 years old;
- the aggregated turnover of the group must not exceed AU$50m (aggregated turnover includes connected entities which may include and foreign entities connected to the group); and
- for shares (but not rights or options) the scheme must be available to at least 75% of the permanent employees with at least three years’ service.
The Bill now provides that in applying the listing, the 10-year and aggregate turnover threshold limits, investments by eligible venture capital and early stage venture capital funds can be ignored. This will mean that assets and investments of those kinds of partnerships and funds will not affect an investee start-up company’s ability to access the start-up concessions.
*ESS interest conditions – From a participant perspective, the ESS interest being offered must meet the following requirements:
- the discount on the ESS interest being offered to an employee must:
- oin the case of a share, be less than 15% of the market value [of the share]; and
- oin the case of a right or option, have an exercise price that is greater than or equal to the current market value of an ordinary share (ie issued at market value or out of the money)
- an employee must be required to hold their rights or shares for the “minimum holding period”. The minimum holding period is set as the same period which currently applies (and will continue to apply) for AUid=”mce_marker”,000 tax exempt schemes — the rights or shares must be held for three years or until the employee ceases employment; and
- the employee must not hold more than 10% of the shares in the company (including the shares that could be acquired by exercising options/rights held by that employee).
The Bill maintains the position that options must have an exercise price equal to, or greater than, the current market value of the underlying share, for the concessions to apply. The government’s position is that this requirement is necessary to ensure that the concession is appropriately targeted, is not subject to potential abuse through inappropriate salary packaging arrangements, and is fiscally sustainable.
In those circumstances, the options will still be considered, for income tax purposes, to have been issued at a “discount” and that discount is not subject to income tax. However, where the options are exercised and the shares are sold, any capital gain by the employee will be subject to capital gains tax (CGT).
Generally where a share is sold, it must have been held for more than 12 months in order for an employee to be eligible to receive the 50% CGT relief. The draft legislation makes clear that the 50% CGT relief will be available to an employee where they have received options subject to the start-up concession and they have held the options and shares collectively for at least 12 months, even where the shares they received on exercise have been sold by them within 12 months of exercise of their options.
The Bill also makes slight improvements to the “minimum holding period” condition, by allowing the Commissioner to exercise his/her discretion to reduce this period (and as a result for the concession to continue to apply) in situations where all relevant employees are required to dispose their rights or shares prior to the end of that period (such as on a trade sale or IPO) and where there was an original genuine intention for the minimum holding period to have been met. This covers a potentially unfair situation where a taxing point occurs, but is completely out of the control of the affected employees.
What happens when an employee ceases employment? – Unfortunately one of the key issues raised by stakeholders as part of the consultation, the cessation of employment as an earlier taxing point, has not been addressed by the government and Australia’s taxation of employee share schemes seems set to remain “out of step” with most of the developed world.
This means that where an employee ceases employment but continues to hold options (perhaps because they are a “good leaver”), they will be required to pay income tax at the time they cease employment, even though they will not have realised any value (and may never realise any value) from those options.
As a way of partially addressing this issue, if an employee chooses not to exercise those options in the future or allows those options to lapse, the changes proposed by the draft legislation will allow the employee to obtain a refund of the income tax they have already paid.
When will these changes take effect? – The changes proposed by the Bill will only apply to ESS interests acquired by employees on or after 1 July 2015.
The current laws will continue to apply to ESS interests acquired before 1 July 2015 and as a result there are no transitional provisions contained in the Bill.
[IT, 9/4/15 – Brett Feltham, and James Newnham, DLA Piper]