The Federal Government has announced welcome changes to the taxation treatment of employee share schemes.  The changes are intended to bolster entrepreneurship in Australia and support innovative start-up companies. 

The Government will unwind changes to the taxing point for options introduced by the former Government in 2009.  Currently, assuming there is no risk of forfeiture, options are taxed at the time they are received by an employee rather than at the time the employee exercises the option (i.e. converts the option to shares).  The proposed changes, which will apply to all companies, seek to mitigate the issues under the current system by deferring the payment of tax until such time as the option is actually exercised by an employee. 

Eligible start-ups will also benefit from the proposed changes.  To qualify as an ‘eligible start-up’, a company must have an aggregate turnover of not more than $50 million and be an unlisted entity incorporated for less than ten years.  The proposed reforms to apply to eligible start-ups include: 

  • Options or shares issued at a small discount by eligible start-up companies will not be subject to up-front taxation provided those shares or options are held by the employee for at least three years.
  • Subject to certain conditions, the taxation of options will be deferred until sale.
  • Shares issued at a small discount will have that discount exempt from tax. 

The maximum period of tax deferral for eligible start-ups is to be extended from 7 years to 15 years.  It is not clear whether this will extend beyond eligible start-ups to all companies. 

The Government will also update the ‘safe harbour’ valuation tables, which are used by companies to value their options, so they reflect current market conditions.

The integrity provisions introduced in 2009 and the $1,000 up-front tax concession for employees earning less than $180,000 per annum will be retained. 

The Government recently released exposure draft legislation giving effect to these changes, which are proposed to commence from 1 July 2015.