The final policy statement relating to the taxation of employee share schemes was announced by the Assistant Treasurer on 1 July 2009.
In addition to the policy statement, the Assistant Treasurer advised the Board of Taxation, of which Hall & Wilcox partner
Keith James is a member, will be tasked with determining how best to value employee shares and devising an appropriate treatment for start-up, R&D and speculative companies.
An Exposure Draft Bill is yet to be released and will replace the draft legislation appended to the 5 June 2009 announcement. The Board will implement a consultative process to allow industry stakeholders to participate in its work and also to comment on the Exposure Draft Bill.
The Government intends to introduce a Bill in the Spring Sitting of Parliament. As such, employers should remain cautious about issuing options and shares to employees before the legislative mechanism is known.
Hall & Wilcox partner Mark Payne says "whilst we are relying on policy statements and are yet to see the detail to support the Government's proposals, these announcements are welcomed and go some way to allaying businesses' concerns about the 2009 Budget announcements".
Key Policy Aspects
- increase the $1,000 exemption threshold to employees with adjusted taxable income of $180,000 to align with the top marginal rate;
- allow deferral of tax for shares and options until there is both no longer a real risk of forfeiture and no restriction on the disposal of the shares;
- allow deferral for up to $5,000 of shares that are salary sacrificed where there is no risk of forfeiture;
- whether the discount is taxed at grant or tax is deferred will be determined by the employer based on the construction of their employee share scheme and is no longer an election made by employees;
- where the plan provides for the deferral of the taxing point, the employee cannot elect to be taxed at the time of grant;
- the meaning of 'real risk of forfeiture' will import a 'reasonable person' test but the precise meaning of the test will not be legislated, but rather explanatory and ATO materials will provide guidance; and
- the maximum period of deferral has been reduced from 10 to 7 years.
Recommendations
- employers should carefully consider how their share and option plans will be
drafted. The manner in which the scheme operates will determine if the equity is
at real risk of forfeiture;
- if the employer's deferral plan is deficient and doesn't achieve its aim of creating a real risk of forfeiture, employees may be exposed to paying tax at grant despite being restricted in their access to the equity;
- a separate and distinct plan, or sub-category of a deferral plan, should be drafted to explicitly provide for the salary sacrifice of shares up to $5,000 to obtain deferral and also to provide for the $1,000 exemption for employees with adjusted taxable incomes of up to $180,000; and
- continue to monitor the progress of these measures, particularly the release of an Exposure Draft Bill and the Board's recommendations about the valuation of employee shares and options and special rules for start-ups and similar companies.
A key strength of the Hall & Wilcox
Taxation team is the size, depth and breadth of expertise, with a number of our people considered leaders in their field. Our advisers have combined legal and accounting tax expertise, with wide-ranging experience in 'Big 4' chartered accounting firms, the State Revenue Office, the Australian Taxation Office and on the Board of Taxation of Australia.
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