Employee Share Schemes: ED

Date: 2015-01-19

The Government has released the Exposure Draft for the proposed changes to the taxation of employee share and option plans (ESOPs). The Exposure Draft generally follows the Government’s announcement on 14 October 2014 (see our Tax Brief), but also includes some changes not previously announced. The Exposure Draft includes some changes to all ESOPs as well as introducing a concessionary regime for ‘start-up companies’. The changes will apply to grants of shares and options from 1 July 2015. 

In relation to the changes that will apply to ESOPs generally:

  • tax will be deferred for qualifying options until exercise and there are no longer any genuine sale restrictions;
  • to qualify for deferral:

- options will no longer be required to be subject to a ‘real risk of forfeiture’ at grant; and

- an employee may hold up to 10% of the ownership interests in the employer, up from the 5% maximum currently. 

  • the maximum deferral period will be extended from 7 to 15 years from grant; and
  • the valuation tables for calculating the market value of options have been revised, with a some significant reductions as compared to the current tables. 

In relation to start-ups, the new concessions provide an exemption from tax for a discount of up to 15% on grant of shares and that any gain on options will be taxed as a capital gain rather than as income. To qualify as a start-up the company must:

  • not be listed
  • have been incorporated within 10 years from the year of grant, and not be a member of a group where a company has been incorporated for longer than 10 years; and
  • have an aggregate group turnover of less than $50m in the income year before the grant.

Broadly, the group will include any ‘body corporate’ that owns more than 50% of the shares in the ‘start-up’ and any of that shareholder’s majority owned entities. Consequently, if a start-up has a VCLP or ESVCLP as a majority investor, then the age and turnover of the VCLP/ESVCLP and all of its majority owned investments will be taken into account in determining whether the start-up company meets these requirements. 

For the shares or options to qualify for this concession:

  • the shares can only be issued at a discount of a maximum of 15%;
  • the exercise price of the options must be at least equal to the market value of the shares at the date of grant;
  • the options/shares must not be able to be sold within 3 years. This will be problem for any company where the shareholders have ‘drag along rights’ enabling them to force a sale of the employee’s shares or options where the company is to be sold; and
  • the company must have a broad based option or share plan available in the prior 3 years to 75% of all permanent employees.

There are several other welcome changes, including allowing the Commissioner to provide valuation safe harbours and improving the refund provisions for lapsed options.

Submissions close on Friday, 6 February. For further information please contact Toby Eggleston, Tel: +61 3 9288 1454, Email: Toby.Eggleston@greenwoods.com.au.

Freehills Patent Attorneys is associated with Herbert Smith Freehills Pty Ltd. This article was first published on the Greenwoods and Herbert Smith Freehills website.