The Federal Government yesterday announced reforms to the tax rules relating to employee share schemes (Proposed Amendments) in its Industry Innovation and Competitiveness Agenda – the press release may be accessed here. The Proposed Amendments primarily relate to start-up companies but some of the reforms are said to apply to all companies. The press release does not outline details of the proposed reforms – it provides high level guidance only.

Summary of the Proposed Amendments

The key features of the Proposed Amendments are as follows:

Reforms applying to all companies

The following reforms are expected to apply to all companies:

  1. Change in the taxing point for options

    The Government will reverse the changes made in 2009 to the taxing point for options. Whilst the press release is not specific as to how the changes will be reversed, it states that the change will mean that discounted options are generally taxed when they are exercised (converted to shares), rather than when the employee receives the options.

  2. New option valuation tables

    The valuation tables which are used by companies to value their options will be updated to reflect current market conditions.

It is unclear whether we will be returning to the pre-2009 position. Pre-2009, the recipient of the option could elect to be taxed up-front on any discount received or to defer the taxing point. The wording of the press release suggests this to be the case in stating that generally the recipient would be taxed when the options are exercised (i.e. they may otherwise elect to be taxed up-front but would generally defer the taxing point).

Reforms applying to start-up companies

Additional tax concessions will apply to both shares and options that are provided by an eligible start-up company (which is a company having an aggregate turnover of not more than $50 million, is unlisted and has been incorporated for less than 10 years) (Eligible Start-Up). The proposed reforms include the following:

  • Shares or options provided at a small discount by an Eligible Start-Up will not be subject to tax up-front provided that the shares or options are held by the employee for at least three years.
  • Certain options will have tax deferred until sale (although no guidance is given as to when options may qualify for this concession).
  • Shares issued at a small discount will be exempt from tax. Again no guidance is given on the quantum of the allowable discount or the conditions upon which the shares must be issued to qualify for this concession.
  • The maximum time for tax deferral will be extended from 7 years to 15 years.

When will the changes come into effect?

All reforms noted above are proposed to come into effect on 1 July 2015 following consultation with industry. We would not expect these changes to affect any shares or options which are issued before 1 July 2015.

Observations

The proposed changes are welcome and provide a clear indication that the Government is committed to encouraging share ownership by employees, particularly for start-ups. Whilst the information in the press release is limited we expect this to be the case so Government may first consult with industry before being too prescriptive.

As noted above, the Proposed Amendments appear to be focused on the availability and extent of tax deferral for option based plans, and share/option based plans for Eligible Start-Ups where shares/options are provided at a small discount. Although this is positive for those companies whose preference is to offer such tax deferral based plans, the Proposed Amendments may be disappointing for those companies that may be hoping to offer plans under which employees are taxed upfront and are able to utilise the discount capital gains concession when disposing of their shares/options.