Australian Review Of Taxation Of Employee Share Schemes

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

09 September 2009

Australia’s Board of Taxation is inviting submissions for its review of elements of the taxation of employee share schemes, it announced on Monday.

In July 2009, at the time of the Budget, the government set out the final taxation treatment of shares and rights acquired under employee share schemes, effective from that date.

Under those arrangements, 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 were acquired. The new tax regulations were designed to apply to all shares and rights acquired on or after July 1, 2009.

The government subsequently issued a public consultation paper on the new regime that, it said, sought to address concerns that had been expressed with regard to the need to address the acknowledged problems of tax evasion and tax avoidance.

It also recognised the need to maintain support for employee share ownership schemes, particularly for low and middle income workers.

Following the consultation, the government increased the income tax threshold for eligibility for an AUD1,000 (USD850) exemption from upfront tax from AUD150,000 to AUD180,000, to align it with the top marginal tax rate threshold.

However, under the final framework for employee share schemes, the taxation of discounts on shares and rights acquired under any scheme will remain the starting principle of the tax regime, with concessional treatment only available for particular schemes.

Upfront tax exemption will be means-tested, and tax deferral will only be accessible where there is a real risk that the shares or rights may be forfeited, such as due to performance hurdles or employment conditions. The pre-Budget use of cessation of employment as a taxing point will be retained and the maximum 10 year deferral period will be reduced to seven years.

However, as a result of the consultation, the government has now asked the Board of Taxation to examine two remaining issues: (a) how best to determine the market value of employee share scheme benefits; and (b) whether shares and rights under an employee share scheme that are provided by start-up, research and development and speculative-type companies should be subject to a tax deferral arrangement, despite not being subject to a real risk of forfeiture, or whether there are other possible options to provide assistance to such companies.

With regard to the first of those issues, the Board is to consider whether the existing rules for valuing unlisted rights to acquire shares properly reflect market value; whether special rules are appropriate or necessary to determine the market value of employee share scheme shares and rights (listed and unlisted); and whether there are suitable alternative mechanisms for determining market value.

The closing date for submissions to the Board is October 9, 2009, and it will produce its final report by February 28, 2010.

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