Originally circulated as an Exposure Draft, Treasury has now released the Bill Tax Laws Amendment (2009 Budget Measure No 2) Bill 2009 containing the Employee Share Scheme (”ESS”) legislation that was announced in the 2009-10 Federal Budget. The original Budget announcement was met with “screams” of concern.
The “screams” were heard. Following consultation with Industry, the current draft law reflects departures (that were foreshadowed in a media release of early July 2009) from the original Budget statement. The broad object of the legislation is to reduce “(tax) scheming” without diminishing genuine employee share acquisition “scheming”.
While Treasury is currently considering comments in relation to the latest draft, several aspects of this are worth highlighting.
The new legislation:
The new legislation will form Div 83A of the ITAA 1997. It will supersede the existing Div 13A of the ITAA 1936. The legislation also amends the TAA and contains a number of consequential amendments of other legislation.
Application:
The EM confirms the June 2009 decision that the changes will apply to “shares, rights and stapled securities acquired on and after 1 July, 2009“.
Legislative Changes relevant to employees:
- “Deferral of tax will be limited to schemes which:
- require that any benefits provided are at real risk of forfeiture and meet certain other conditions [that are similar to the conditions for ‘qualifying shares/rights' under Div 13A]; or
- are provided through a salary sacrifice arrangement offering no more than $5,000 worth of benefits [per annum (per commercially distinct employer)] to an employee, and where
- there is no real risk of forfeiture; and
- the rules of the scheme explicitly state that tax will be deferred; and
- [the schemes meet certain other conditions, notably: the salary sacrifice is made in exchange for shares (rather than rights to shares); the shares are received without any consideration payment; and further conditions which are similar to those for ‘qualifying shares/rights' under Div 13A].”
For those attracted to “(tax) scheming”, the EM has some salutary examples of “real risk”!
- “Employees with taxable income (after adjustments) of less than $180,000 will receive the upfront concession and not pay tax on the first $1,000 of discounts received, if the scheme meets certain conditions” (including a minimum ESS holding period) - cf. Div 13A where employees in a qualifying scheme can elect to be taxed upfront and (without a means test) not to pay tax on the first $1,000.
- “Eligibility for the upfront or deferred tax concession is based on characteristics of the employee share scheme” - cf. Div 13A where eligibility for the upfront or deferred tax concession depends on “qualifying” shares or rights and an employee election.
- In an ESS where tax is deferred, the taxing point is the earliest of:
- “where there is no risk of forfeiture of the benefits and any restrictions on sale or exercise are lifted”;
- “when the employee ceases employment”; or
- “seven years after the share or rights are acquired” (cf. Div 13A where a ten year period exists.)
- “An employee is eligible for a refund of tax on forfeited shares and rights if the forfeiture was not the result of :
- a choice of the employee; or
- a condition of a scheme that protects the employee against a fall in market value.”
(cf. Div 13A - eligibility for refund only applies to forfeited rights (not shares) and arises if the employee loses the right without having exercised it.)
- Some more focussed significant points of change are:
- The measures contemplate a more flexible approach to determination of market value consistent with its ordinary meaning.
- In relation to deferred taxation of an ESS interest, the amount included in the recipient’s assessable income is the difference between the market value of the interest at the ESS deferred taxing point and the cost base of the interest. By contrast, where tax is payable upfront, the discount (i.e. market value of the ESS less the consideration paid) is included in the recipient’s assessable income.
- It appears that apportionment is not available for employees who acquire shares/options while a non-resident and a deferred taxing point occurs when they resume Australian tax residency.
Legislative Changes relevant to companies offering an ESS:
- “Employers are subject to annual reporting requirements.”
Legislative Changes relevant to both employees and companies offering an ESS:
- “A limited form of withholding tax will be introduced where an employee fails to provide their employer with a TFN or ABN.”
What has not changed:
- The default position is upfront taxation of any discount to market value of ESS interests in shares or rights.
- Takeovers and restructures - rollover of certain taxing points that would otherwise occur because of corporate restructure is available under Div 83A.
This edition of ‘The Assessment’ was prepared by Andrew Orange & Rob Power. If you would like assistance in relation to taxation of employee shares schemes please feel free contact Rob or Andrew by phone on 03 8662 3200 or by email - Rob Power: robp@webbmartinconsulting.com.au or Andrew Orange: andrewo@webbmartinconsulting.com.au
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