The Government has announced today its “Industry Innovation and Competitiveness Agenda” that is designed to drive growth and jobs in key industries. A key part of the agenda is changes to the taxation treatment of employee share schemes.
The Government has recognised that changes made to the tax treatment of Employee Share Schemes by the previous Labor Government have effectively brought to a halt of the use of employee share schemes by start-up companies. It proposes to largely reverse those changes.
The changes announced today include:
For all companies
- Reversal of the changes made in 2009 to the taxing point for options such that options issued at a discount to employees will be generally be taxed when they are exercised i.e. when they are converted into shares.
For start-up companies
- Introduction of a more favourable treatment of options or shares provided by start-up companies. A start-up company has been defined as an unlisted company that has been incorporated for less than ten years and with a turnover of less than $50 million and the changes include:
- no up-front taxation as long as the shares or options are held by the employee for at least three years;
- certain options will have the taxing point deferred until the option is sold;
- shares issued at a small discount will have the discount exempt from income tax; and
- extension of the maximum deferral time from seven to fifteen years.
There will also be an update to the ‘safe harbour’ valuation tables used by companies to value their options to ensure current market conditions are reflected.
The Treasurer will consult with industry to ensure that the draft legislation will deliver the intended outcome, with the legislation proposed to come into effect from 1 July 2015.
Whilst the purpose of employee share schemes is to generally attract and retain high quality employees, in our experience options issued under the current rules had the opposite effect. The taxing point was before the employee received any cash to fund their ultimate income tax liability.
Whilst the reversal of the changes made in 2009 is to be welcomed, does that mean we are going back to the previous rules or some new hybrid?
The inclusion of the definition of start-up company is very positive along with the small discount being exempt from tax. We also welcome the extension of the tax deferral from 7 to 15 years however, if the shares will ultimately be subject to income tax the taxing event still has to be linked to a liquidity opportunity to overcome one of the more substantive issues of the current taxation provisions.
We would welcome any proposal to treat the shares as being subject to capital gains tax rather than income tax during the tax deferral period.