It would be no understatement to say that the backlash was significant from both employees and employers from the unanticipated changes announced to the taxation of Employee Shares Schemes in 2009-2010 Budget.
During the initial consultation, the Government released a Consultation Paper (the Paper) and took on board some of the criticism levelled at the proposed budget measures. The Government's final position was announced on 1 July 2009 and reflects the positions put forward in the Paper subject to the following modifications:
- increasing the income tax threshold for eligibility for the upfront tax concessions from $150,000 to $180,000, to align it with the top marginal tax rate threshold
- providing further clarity on the meaning of 'real risk of forfeiture' via the use of explanatory materials and Tax Office materials, including through the use of a range of example cameos to assist industry
- Employees receiving benefits under these schemes will not be able to pay tax upfront and the scheme's governing rules must clearly distinguish these schemes from those eligible for the upfront tax exemption
- moving the deferred taxing point from a point at which the taxpayer will no longer have a real risk of losing the share or right to a point at which:
- in the case of shares, there is both no longer a real risk of the taxpayer losing the share and no restriction (present at acquisition) preventing the taxpayer from disposing of the share
- in the case of rights to shares (options), there is both no longer a real risk of the taxpayer losing the right and no restriction (present at acquisition) preventing the taxpayer from either disposing or exercising of the right but if, after exercising the right, the underlying share is subject to forfeiture and restrictions prevent the taxpayer from disposing of the underlying share, it is the point at which there is both no longer a real risk of the taxpayer losing the share and no restriction (present at acquisition) preventing the taxpayer from disposing of the share
- allowing the deferral of tax in relation to up to $5,000 worth of shares under particular salary sacrifice based employee share schemes, where there is no real risk of forfeiture
- removing the reporting requirement for employers to report the market value of employee share scheme benefits in the year of grant, if this is not the year in which the employee is taxed
- establishing a 3 part forward plan of consultation with industry by:
- asking the Board of Taxation to examine determination of market value and special deferral considerations for start-up, R&D and speculative type companies
- committing to an exposure draft process for the Bill
- asking the Board of Taxation to consult with relevant stakeholders to examine technical matters associated with the implementation of these reforms and to report to Government in time to allow the Board's views to be taken into account in the draft legislation.