The Federal Government has announced changes to the taxation of employee share and option schemes. These announcements will be beneficial to Australian start-up companies and some established companies.

As part of its National Industry Investment and Competitiveness Agenda ("the Agenda"), the Federal Government announced a series of ambitions for Australia, one of which is to amend the current taxation of employee share and option schemes.

Here is a summary of the changes announced in the Agenda.

Changes for all companies expected from 1 July 2015

The Federal Government has stated that the taxation point of option schemes will, generally speaking, be changed so that they will be taxable to the employee at the time of exercise of the option (i.e. when the employee converts the option into a share). Under the current rules, the taxing point of an option is, generally speaking, in the year when the option is granted. The Federal Treasurer will consult with industry to develop these rules.

Concessional treatment for start-up companies expected from 1 July 2015

The Government has also announced a "start-up concession" for employees of start-up companies. In summary, a start-up company will be an unlisted company that has been incorporated for less than 10 years and with a turnover of less than A$50 million. In such a case, the start-up company will benefit from the following new concessions:

  • Generally speaking, no taxation in the year that options or shares are granted to the employee, so long as these are held for at least three years.
  • Shares issued to such start-up company employees with a discount of no more than 15% at the time of grant, will have the discount exempt from income tax.
  • The current maximum deferred period of seven years will be extended to 15 years for such employees.

Note further that the Government will also issue "safe harbour" valuation rules for unlisted options to "reflect current market conditions".

Where to from here?

The Government has stated that it will now enter into a consultation period with industry with a view to having legislation in place from 1 July 2015. In other words, prior to 1 July 2015, the existing rules for employee option and share schemes will continue to apply.

We consider that there are two significant positive elements in these announcements.

Firstly, the concession regarding all options issued to employees only becoming taxable when they are converted to shares, is a small, positive step as compared with the current rules where such options are taxable as soon as the real risk of forfeiture period (if any) is ended.

Secondly, the new regime for start-up companies is certainly more favourable in order to allow start-ups to issue options to key staff. We would expect start-up companies (and those unlisted companies which have been operating for less than 10 years, with turnover below A$50 million), to seek to become eligible for the new rules once they are enacted from 1 July 2015.

In conclusion

We would encourage clients and interested parties to seek to make submissions to the Federal Treasurer as to further changes that could be made to the rules for employee share and option schemes.

Overall, we suggest that these announcements are a positive steps forward in order to develop a more equitable regime for the taxation of employee options and share schemes in Australia - particularly for start-up companies.