Australia Releases Employee Share Schemes Tax Review

by Mary Swire, Tax-News.com, Hong Kong

27 April 2010

Australia’s Assistant Treasurer, Nick Sherry, has released the Board of Taxation's review into elements of the taxation of employee share scheme arrangements.

He had asked the Board in July 2009 to examine how best to determine the market value of employee share scheme benefits, and whether shares and rights under an employee share scheme that are provided by start-up, research and development (R&D) and speculative-type companies should be subject to a tax deferral arrangement, despite not being subject to a real risk of forfeiture.

The Board's review, which was based on extensive consultations, makes five recommendations, and includes a report by the Australian Government Actuary into the valuation of unlisted rights.

"The findings of the Board are consistent with the government's employee share scheme reforms, and we fully accept four of the five recommendations and, in relation to a fifth, we partially accept it and will delay the consideration of one particular aspect to a later date," Sherry said. "The Tax Office has agreed to all aspects of the recommendations that relate to it and has already started work on implementing each of them."

On the issue of how to value listed and unlisted shares and options or rights within a share scheme, the Board found that the approach employed by the government in the 2009 reforms, using the ordinary meaning of market value to value these interests, is the most appropriate for those interests.

On the use of set statutory valuation tables, the Board also endorsed not using such tables for listed and unlisted shares, but supported the government's decision to retain statutory valuation tables for unlisted rights.

"This decision, which gives taxpayers a simpler way to value unlisted options and rights, was endorsed by the Board, although the Board also recommended that the factors underlying the statutory valuation tables be reviewed and updated," said the Assistant Treasurer.

"The government agrees that the methods underlying these valuations should be made more transparent but notes that the immediate application of the actuarial tables included in the report would increase the levels of tax on these types of interests," he added. "As such, we're not going to rush into this. We will talk to the affected community over the next twelve months and make any decisions on updating the statutory table in the context of the 2011-12 Budget."

The Board also recommended that the Commissioner of Taxation provide further guidance material on acceptable valuation methodologies for employee share schemes, and develop an online calculator tool to assist taxpayers. "The Tax Office expects these guidance materials to be ready to help taxpayers in the near future. They have also started work on the development of online calculators," Sherry said.

On the tax treatment of employee share schemes used by start-up, research and development and speculative-type companies, the Board recommended against the introduction of separate tax deferral arrangements, citing a range of integrity, complexity and compliance concerns. It recommended that, should the government wish to provide additional support to start-up, R&D and speculative-type companies, it should consider more targeted approaches to providing this support outside of the employee share schemes tax regime.

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