The Division 83A (employee share plan) amendments were tabled in Parliament yesterday, 25 March 2015, and include welcome improvements on the exposure draft released last January (see our Riposte on the exposure draft legislation).

Most of the changes concern the new start-up company regime, which the Bill confirms will commence on 1 July 2015 – it will apply to grants on and after that date:

  • the 50% CGT discount will be made available once options have been held for 12 months, and it won’t be necessary to hold shares for 12 months following exercise of options;
  • start-ups won’t fail the $50m turnover threshold as a result of being grouped with investor VCLP’s or Early Stage VCLPs; and
  • the Tax Office will be given a discretion to waive the 3 year holding requirement – although as currently drafted only where there is a sale of 100% of the shares in a company.

Listed companies will remain excluded.Qualifying start-ups will be able to provide employees with at-the-money options free of tax until sale of the shares acquired on exercise. Gains on sale will be subject to CGT rather than income tax ie, able to be reduced by any available capital losses and eligible for the 50% CGT discount.The ATO is now preparing model plan documents and the acid is on ASIC to come up with a regulatory framework which will allow the new regime to work as planned. Class order CO 14/1001 released in December last year for unlisted companies would stall the new regime if left unchecked.

The Bill doesn’t make any substantive modifications of the exposure draft for large public company offers. Tax at cessation of employment remains – we can now only look to the pending Government white paper on that front. The problem for Government is that while its removal would only change the timing of tax collections, the initial hiatus would amount to a permanent gap.Nevertheless, remember the good work already reflected in the exposure draft:

  • Options will once again be taxed on exercise rather than at an earlier vesting – plan rules can be amended to reinstate exercise periods and return control of the taxing point to individual participants.
  • Refunds will be allowed for tax paid, for example at cessation of employment, on options and rights that ultimately lapse unexercised. This measure, together with removal of tax at vesting, makes the use of options once again viable. Regrettably, the correction will not be extended to options already on issue.
  • Extension of the maximum deferral period from 7 to 15 years should ensure that most employees never hit this arbitrary taxing point.
  • Removal of the real risk of forfeiture requirement for tax deferral on rights means Boards can retain more discretions to waive forfeiture conditions for good leavers.
  • Salary sacrifice into rights? – removal of the real risk of forfeiture requirement effectively also opens the door for salary sacrificing into rights without the $5,000 ceiling and other restrictions applicable to share plans.

Freehills Patent Attorneys is associated with Herbert Smith Freehills Pty Ltd. This article was first published on the Greenwoods and Herbert Smith Freehills website, and was written by Adrian O'Shannessy (Director) and Cameron Blackwood (Senior Associate).