On Tuesday 14 October 2014 the Australian Government confirmed it would introduce a number of key reforms as part of its “National Industry Innovation & Competitiveness Agenda”.
One significant reform on the Agenda was the removal of the current up-front tax treatment for Employee Share Schemes (ESS), which requires employees to face immediate tax costs on shares or options they receive from their employers. Legislation to implement these changes is scheduled to be operational from 1 July 2015.
History of the taxation of ESS
Prior to 2009, the default position was that employees were taxed up-front on any discount they received as part of an ESS package. However, for qualifying shares and options (subject to certain conditions) the employee could choose between up-front or deferred taxation.
During 2009, in an attempt to target high-level executives using the schemes to hide shares, the Labor party introduced a policy that required employees to pay tax immediately on shares or options received by their employer, unless there was a risk of employees forfeiting the shares or options. These changes effectively ended the provision of ESS options to employees, particularly start-up companies.
Proposed taxation reform for ESS
Under the new regime, businesses that are unlisted, have been incorporated for less than 10 years and have an annual turnover of less than $50 million, will be able to provide employees with shares or options at a small discount that will not initially be subject to tax, provided the employee holds the shares or options for a minimum of three years.
Employees will be able to defer their tax on the share issues from seven to 10 years, which the government plans on increasing to 15 years. The $1,000 up-front tax concession available under the existing policy (where employees are not taxed if the discount they receive is less than $1,000), will still remain.
The change to the taxing point for options will apply to all companies and is estimated to cost the government around $200 million over the next four years.
Benefit for start-ups
It’s well recognised that entrepreneurs and start-ups are important to the Australian economy for testing new ideas, developing new products and promoting innovation, and the new measures will help this group do more of all these things, thus promoting growth.
It would appear that private equity firms, technology and science innovation businesses are most likely to benefit, as share schemes are an important vehicle to minimise wage expenses while securing the best talent.
This is a welcome change for start-ups, as it provides a real incentive for employees to work for them in return for receiving an equity interest in the company rather than a base salary. It should reward employees by providing them with a financial share of the potential success of a company.
This communication provides general information which is current as at the time of production. The information contained in this communication does not constitute advice and should not be relied upon as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Should you wish to discuss any matter raised in this report, or what it means for you, your business or your clients' businesses, please feel free to contact us.