Australia Introduces Law Reform On Employee Share Schemes

by Mary Swire, Tax-News.com

22 October 2009

The Australian government has introduced into parliament the final form of the legislation to reform the taxation of employee share schemes.

The Assistant Treasurer, Nick Sherry, highlighted the government's strong support for employee share schemes. He said that the government “believes employee share schemes align the interests of employees and employers, boost productivity and encourage good corporate governance.”

“ These reforms,” he added, “will better target the employee share scheme tax concessions and improve corporate governance outcomes by encouraging schemes to offer genuine loyalty or performance conditions to gain access to the deferred tax concession."

In the 2009-10 budget, the government announced that all discounts on shares and rights provided under an employee share scheme would be assessed in the income year in which the shares and rights are acquired. However, responding to concerns expressed by stakeholders following the budget announcement, the government issued a public consultation paper which sought to better understand those concerns, and canvas a number of options to improve the taxation of employee share schemes.

As a result of consultation undertaken by both the government and the Board of Taxation, the legislation now introduced:

• widens the refund provisions, to ensure that a refund will not be denied when employee share scheme benefits are forfeited as a result of leaving employment;
• includes significant additional guidance and examples of the real risk of forfeiture test, including when forfeiture conditions relating to retirement would constitute a real risk;
• provides clear transitional arrangements for shares and rights acquired before July 1, 2009;
• adjusts the provisions related to salary sacrifice arrangements to make it administratively easier to offer complex schemes involving both shares or rights with a real risk of forfeiture, and salary sacrifice arrangements;
• exempts employee share trusts from capital gains tax over shares acquired to satisfy the exercise of rights provided under an employee share scheme; and
• amends certain tests in the exposure draft package, such as the tests requiring schemes to be offered to a broad cross-section of employees, to make the rules easier to comply with.

Sherry has previously asked the Board of Taxation to consider two further issues raised in consultation: how to best determine the market value of employee share scheme benefits, and whether shares and rights under an employee share scheme at a start-up, R&D or speculative focused company should have separate tax deferral arrangements, despite not being subject to a real risk of forfeiture. He said that the Board will report their findings in relation to these issues to the government by February next year.

Sherry added that, consistent with the current law, tax on employee share scheme benefits cannot be deferred beyond the time when an employee ceases employment with their employer. This, he said, had been a feature of the law since 1995. "I have considered stakeholder requests for the removal of the cessation of employment as a taxing point, but to do this would raise significant tax integrity issues, and punch a major hole in the revenue base, and that is untenable at this time," he concluded.

As previously announced, the changes to the taxation of employee share schemes will apply from July 1, 2009, and is expected to contribute AUD135m (USD125m) to tax revenue in the four fiscal years to 2012-13.

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