Employee share scheme amendments introduced into Parliament

The current scheme

Under current laws, employees who take part in employee share schemes are required to pay tax on any discount on the full value of a share or option they receive from their employer. This is currently the case in relation to both of the two types of employee share schemes - qualifying shares schemes and non-qualifying share schemes.

The tax law currently provides two ways for an employee in a qualifying share scheme to have tax on the discount assessed:

  1. The employee can elect to be assessed in the income year the shares or options are acquired. If so, the employee can access an upfront tax exemption of up to $1,000 on discounts received each year.
  2. If an election is not made, taxation of the discount is deferred until a later time, such as when the employee disposes of the share.

In comparison, if the shares or options are issued under a non-qualifying scheme, the employee is taxed on the discount when he or she acquires the shares or options. This means they do not enjoy the tax benefits associated with qualifying employee share schemes.

Further, it appears that some taxpayers are able to avoid paying tax on the discount by using the deferral method of assessment and then not declaring the discount at the appropriate time.

The proposed amendments are designed to remove the inconsistency between the two types of schemes and the potential for taxpayers to avoid paying tax on a discount by using the deferral method and then not declaring the discount.

Proposed changes

The following proposed changes have been introduced into parliament and have been passed by the House of Representatives.  The Bill has been referred to the Senate with a recommendation to be passed.

It's proposed that these new arrangements will apply to any shares, rights and stapled securities acquired on or after 1 July 2009.

Under the proposed amendments:

  • The tax deferral option is removed making upfront taxation the default position.
  • 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, or 
    • are provided through a salary sacrifice arrangement offering no more than $5,000 worth of benefits to an employee, and where the rules of the scheme explicitly state that tax will be deferred, and the scheme and the employee meet certain other conditions.
  • Eligibility for the upfront or deferred tax concession is based on the characteristics of the employee share scheme.
  • Employees with a taxable income (after adjustments) of less of 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.
  • In schemes where the tax is deferred, the taxing point is the earliest of:
    • when there is no risk of forfeiture of the benefits and any restrictions on the sale or exercise are lifted
    • when the employee ceases employment, or
    • seven years after the shares or rights were acquired.
  • 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 (except a choice to leave employment) or a condition of the scheme that protects the employee against a fall in market value.
  • Employers are subject to annual reporting requirements.  It's proposed that employers be required to report on the number of shares and rights provided at grant and the market value of those shares and rights both at grant and at the taxing point (if different). To minimise compliance costs, employers will only be required to provide the market value of shares and rights acquired under an employee share scheme at an employee's taxing point.  Reporting will enable the Tax Commissioner to conduct data matching activities and pre-fill tax returns to assist employees with their tax obligations.

  • A limited form of withholding tax applies in cases where an employee fails to provide their employer with a TFN or ABN at the taxing point.

Employee share schemes and Capital Gains Tax

In most cases, employee share scheme interests are CGT exempt, until the interest has been taxed under the employee share scheme rules. Once an employee share scheme interest has been taxed under the employee share scheme rules, it is subsequently taxed consistent with other capital assets, most likely under the CGT regime, but possibly under other regimes such as the trading stock rules.

The new employee share scheme rules are intended to ensure all employees participating in employee share schemes are taxed consistently regardless whether the scheme utilises a trust structure.