Employee Share Scheme obligations are often an area that is overlooked but penalties for non-compliance can be severe.
In Australia, there are obligations relating to Employee Share Scheme (ESS) taxation and reporting but it is often an area that is overlooked. ESS refers to a scheme under which an employee (or their associate) is provided with an ESS interest in a company, which can include either shares or rights to acquire such shares (for example, share options). The shares/rights can be either in the company which is the employer or another company, such as parent or subsidiary company in the same or another jurisdiction.
Employee tax liability
In their individual income tax returns, employees are required to treat any discount on acquisition of the ESS interest as assessable income. The discount would be the excess of the market value of the interest over the acquisition cost to the employee.
The employee may either be liable for the tax upfront, possibly at the time of acquisition of the ESS interest, or they may be entitled to defer the taxing point. When the employee is liable for tax on the ESS discount upfront, an exemption of up to AUD$1,000 is available provided certain conditions are met. For foreign resident individuals, only the part of the discount that relates to their employment in Australia is taxable.
Employee Share Schemes can be an effective tool to incentivise employees, but it is important to communicate the full ramifications of the scheme to employees for their individual tax liabilities.
Employee deferred taxing point
When an employee's entitlement to the ESS interests is subject to a real risk of loss or forfeiture or there are restrictions on disposal, the taxing point for shares is deferred to the earliest of:
- there is no longer any real risk of loss or forfeiture of the interests and there are no longer any restrictions on disposal of the interests
- when employee ceases the employment in respect of which the interests were acquired
- 15 years after employee acquires the interests.
An additional deferred taxing point is added to the three above when, after exercising the right, there are no longer any restrictions on the underlying shares being disposed of, and there is no real risk of the underlying shares being lost or forfeited.
However, for both shares and rights, if the employee disposes of the relevant interest within 30 days of the earliest deferred taxing point, the time of disposal becomes the deferred taxing point. If the taxing point of the ESS interest is deferred, the market value of the interest at the deferred taxing point is used in the calculation of the employee's assessable income.
Start-up company exemption
Income tax exemption is available for employees of start-up companies in relation to their ESS interests at the time of acquisition. Instead, such ESS interests are taxed under the capital gains tax rules.
To be eligible for this concession the ESS must meet certain conditions including:
- no equity interests in the company (or subsidiary/holding company) can be listed on an approved stock exchange
- the company has an aggregated turnover less than AUD$50M in previous income year
- the employer is resident for tax purposes in Australia
- the company has been incorporated for less than 10 years
- if it is a share, the discount cannot exceed 15% of market value
- if it is a right, the amount exercise price must be equal to or greater than the market value of the underlying share.
Reporting obligations for employers
The employing company has certain reporting obligations in relation to ESS interests granted to employees. They must
- provide annual statement to employees containing ESS discount amounts arising from shares/options granted, either taxed upfront or deferred taxing point occurring during the year. This deadline is 14th July after 30 June financial year end
- provide annual statement to Australian Taxation Office (ATO) detailing all ESS discounts for ESS interests whose taxing points occurred during the year, covering all relevant employees. This deadline is 14th August after 30 June financial year end.
There are penalties for non-compliance, and for large taxpayers and Significant Global Entities (SGE), they can be severe. For example, penalties applicable for SGEs for lodging documents more than 112 days late is AUD$525,000.
We can help
TMF Australia can assist companies to be fully compliant in all their Australian ESS obligations, which is of great importance given the inherent complexity of the ESS rules. Our experts can also provide guidance and assistance in relation to ensuring employee's compliance requirements. Need more information about the ESS obligations in Australia or other services offered by TMF Group? Talk to us.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.