Ato taxation of employee share options

The Government has published exposure draft legislation to lessen the taxation of Australian employee share and share option plans. If implemented, tax changes introduced inthat effectively put a stop to the use of employee share option plans in Australia, will be reversed, and wider tax concessions for share and option plans will also be introduced. This draft legislation follows an announcement made in October of last year see our previous update in October The changes are proposed to apply to shares and options acquired on and from 1 July Currently, options that qualify for tax deferral are taxed at the earliest to occur of the following:.

It is proposed that options that qualify for tax deferral will be taxed at the earliest to occur of the following:.

ATO ID / (Withdrawn) - Employee Share Options: taxation of a discount derived by a resident of the United States on the exercise of share options granted from previous employment in Australia

The increase in the maximum tax deferral period, from 7 to 15 years, will apply to share plans as well as option plans. It is proposed that the risk of forfeiture will no longer be a condition of option plans, provided there is a restriction on disposal of the options. If introduced, companies that qualify for this new concession will be able to issue certain shares or options to employees with no tax payable up front.

Options must have an exercise price equal to or greater than the current market value of a share to qualify. The employee will then hold the shares or options as a CGT asset, paying tax only on an eventual disposal of the shares. There will also be no taxing point when options are exercised and shares are obtained.

This is likely to be problematic, given that most unlisted companies generally prefer not to allow exercise of options until a liquidity event, at which time the employee's shares will be dragged along in the sale most likely within 12 months. It may be that the benefit of this concession is somewhat limited unless the Federal Government can be convinced to amend the exposure draft legislation. The greatest difficulty with this proposal - establishing the market value of shares in start-up companies - remains largely unaddressed at this stage.

The exposure draft legislation does include a facility for the Commissioner of Taxation to implement safe harbour valuation methods in future by regulation, and the Government has indicated they will continue consultation with industry in this area. Other conditions, broadly matching those which apply to the current up-front and tax deferral concessions, will also apply:. With shares, the upfront discount will never be taxed, as the gain for CGT purposes will be the sale price less the market value of the shares when issued.

In the case of options, tax on the discount is effectively deferred until the options are exercised and the resulting shares disposed of, at which time the gain for CGT purposes will be the sale price less the aggregate of the amount paid by the employee to acquire the option and the exercise price.

Currently, where an employee pays tax on the discount on an option e. Under the proposed changes, it appears that a refund of tax will now be available in these circumstances. To print this article, all you need is to be registered on Mondaq. Click to Login as an existing user or Register so you can print this article. Your use of the Website constitutes your agreement to the following terms and conditions of use.

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We use cookies to give you the best online experience. By using our website you agree to our use of cookies in accordance with our cookie policy. Norton Rose Fulbright Australia. Your LinkedIn Connections at Firm. It is proposed that options that qualify for tax deferral will be taxed at the earliest to occur of the following: The start-up company must: Other conditions, broadly matching those which apply to the current up-front and tax deferral concessions, will also apply: There is no risk of forfeiture requirement for this concession.

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Employee share schemes | Australian Taxation Office

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