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Employee share schemes are set to become a more attractive salary packaging component following the recent release of draft legislation addressing the tax treatment of these schemes, says Pitcher Partners.
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Pitcher Partners responds to ESS changes
16 January 2015
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Pitcher Partners partner Peter Braine said the proposed changes detailed in the draft legislation will unwind many of the ESS tax changes introduced by the previous government in 2009. In particular, he said the legislation will reverse the changes made to the taxing point for options for all companies.
That is, discounted options will now be taxed when they are exercised, rather than when the employee receives the options, he said.
“Under the existing rules, options are often taxed when they are provided to the employee, which means that employees are hit with an up-front tax liability even though the options may not have any real market value at that point.
“This is because the regulations used to value the options under the existing rules make certain assumptions which do not always accord with reality. Rather than being a motivating force for employees to work harder, the existing rules are often regarded by clients as more of a hindrance than an incentive.
“The proposed changes should mean that the tax on the options will be paid when there is an actual value to the options. This move away from up-front tax is likely to be welcomed by our clients, as it will make employee share schemes a more attractive salary packaging component, especially from a cash flow perspective as it will allow cash to be retained and reinvested in the business instead of being used to pay salaries,” he said.
Mr Braine said the government also announced additional concessions for eligible start-up companies including unlisted companies that have been incorporated for less than 10 years with an aggregate turnover of not more than $50 million.
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The concessions include deferring the taxation on certain options until sale, provided certain conditions can be satisfied.
“As highlighted in the Pitcher Partners’ submission to the Parliamentary Joint Committee on Corporations and Financial Services, the present taxation of employee share arrangements is particularly restrictive, with the consequence that employee equity participation in the family business sector is virtually non‐existent in Australia.
“This is to be contrasted with the US, for example, where greater flexibility has enabled a much wider take-up of these initiatives with the consequence that a succession of the business to employees is more common where family succession is not pursued.”
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