Australia: Proposed tax changes signal rebirth of employee share schemes

The Federal Government has announced proposed taxation reforms to Employee Share Option Plans (ESOPs).

Under the proposed changes employees who receive an option under an ESOP will not be taxed until the option is exercised (that is, converted to shares). Also, for eligible companies employees who exercise options may defer taxation until sale of the associated shares.

To be eligible, companies will have to have an aggregate turnover of not more than $50 million, be unlisted and incorporated for less than 10 years.

The changes are proposed to bolster entrepreneurship and support innovative start-up companies. The reform will reverse the 2009 taxation changes to ESOPs.

ESOPs provide employees a financial incentive in the development and success of a company. As such, ESOPs assist start-up companies to attract and retain high-quality staff.

The Federal Government intends to amend the taxing point for ESOPs. This means that the taxing point of options will be deferred until the exercise of the option (converted to shares), rather than when the option is received.

The reforms mean that companies will be able to remunerate staff with ESOPs without placing upfront taxation burdens on them.

The reforms will also allow eligible companies to provide ESOPS at a small discount that will not be subject to up-front taxation, where the ESOP is held by the employee for at least three years. Instead, options under certain conditions will have taxation deferred until sale and issued shares will have the discount exempt from tax.

The maximum time for tax deferral under ESOPs will also be extended to 15 years.

The legislation is proposed to come into effect on 1 July 2015.

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