Changes to employee share scheme rules

On 14 October 2014, the Prime Minister and the Minister for Industry released the Commonwealth Government's National Industry Investment and Competitiveness Agenda. This included a number of initiatives, including the expected changes to the taxation of Employee Share Schemes (ESS). See our alert for details.

Draft Taxation Determination on employee share scheme rules

On 24 October 2014, the Commissioner published draft Taxation Determination TD 2014/D16 which considers whether a right to acquire a beneficial interest in a share is an ‘indeterminate right’ (for the purposes of the employee share scheme rules in the Income Tax Assessment Act 1997) in circumstances where the grant is subject to ‘shareholder approval’.

In TD 2014/D16 the Commissioner expresses the view that where a right to acquire a share is granted subject to shareholder approval, the employee acquires only a right to have the matter put to the shareholders and nothing more. According to the Commissioner, the employee therefore does not acquire an ‘indeterminate right’, and prior to shareholder approval being given, the right is not an ‘ESS interest’ for the purposes of the employee share scheme rules. Based on this view, the employee share scheme rules would only apply at and from the time that shareholder approval is obtained.

In a Note to the ‘Explanation’ published with TD 2014/D16, the Commissioner qualifies the position taken in TD 2014/D16 when he states that “where a right is granted subject to shareholder approval on terms providing that if shareholder approval is not obtained the employee will receive an amount of cash as compensation, the right is a right to receive property and would be an ‘indeterminate right’”. Where however the cash component is nominal or disproportionately small, the Commissioner goes on to state that it would be necessary to consider whether that cash compensation truly relates to the grant or whether the general anti avoidance provision (Part IVA of the Income Tax Assessment Act 1936) apply.