Concessions for eligible start-ups and better treatment for options

On 14 October 2014, the Australian Government announced changes to the taxation of employee share schemes (ESS). The legislation is to be developed in consultation with industry and should come into effect from 1 July 2015.

The announcement indicates that the changes will include the following:

  • Options issued under deferred tax schemes will be taxed at exercise (unless the employee ceases employment earlier). If introduced, this measure would reverse changes to the taxation of employee share options made by the previous Government in 2009. These announced changes should make options attractive as an employee incentive;

  • Further concessions for eligible start-ups (as defined, but including turnover of not more than $50 million, being unlisted and incorporated for less than 10 years). In particular:

    • tax deferral (as a capital gain with possible 50% capital gains tax discount) until sale, for options issued under certain conditions;

    • tax exemption for shares issued at a small discount;

    • options or shares must be held for at least three years; and

    • maximum time for tax deferral extended from seven years to 15 years; and

  • Safe harbour valuation tables will be updated to ensure they reflect current market conditions.

The Government has indicated that the following aspects of the current ESS rules would not be changed:

  • the integrity provisions introduced in 2009 (e.g. ESS reporting rules);

  • the existing up-front tax exemption for the first $1,000 of ESS interests given to an employee who earns less than $180,000 per annum.

The Fact Sheet released in relation to ESSs (Improving taxation arrangements for employee share schemes) provides a number of examples of how the changes are expected to work and a summary of the taxing points under the proposed new arrangements.

The Government has also indicated that it will deliver a White Paper on the Reform of Australia's tax system (possibly during 2015) which may contain additional measures to encourage employee share ownership.