The Government is proposing to change the current income tax rules that apply to Employee Share Schemes (ESS). In broad terms the new rules will:

  • reverse for employees of all corporate tax entities some of the changes made in 2009 to the taxing point for rights
  • introduce a further taxation concession for employees of certain small start-up companies
  • support the ATO to work with industry to develop and approve safe harbour valuation methods and standardised documentation that will streamline the process of establishing and maintaining an ESS.

Under the current rules generally, a discount the employee receives on shares, rights or stapled securities (ESS interest) acquired under an ESS is included in their assessable income when they acquire the beneficial interest in those shares, rights or securities. In certain circumstances the employee may reduce the amount included in their assessable income by up to $1,000. However if there is a real risk that the employee might forfeit the ESS interest they acquired under the ESS (ESS deferred scheme), the employee will only include the discount in their assessable income in the first income year the employee is able to dispose of the ESS interest.

The proposed new rules will change the taxing point for ESS deferred schemes. The taxing point will be the earliest of:

For shares

  • when there is no real risk of forfeiture of the shares and any restrictions on the sale are lifted
  • when the employee ceases employment
  • 15 years after the shares were acquired.

For rights

  • when there is no risk of forfeiture of the rights and any restrictions on the sale are lifted
  • when the employee exercises the rights
  • when the employee ceases employment
  • 15 years after the rights were acquired.

The proposed new rules will also allow employees of certain small start-up companies to receive further concessions when acquiring certain shares or rights in their employer or a holding company of their employer. These further concessions are an income tax exemption for the discount received on certain shares and the deferral of the income tax on the discount received on certain rights which are instead taxed under the CGT rules.

It is also proposed that the Commissioner will be empowered to approve safe harbour valuation methodologies which will be binding on the Commissioner by legislative  instrument.