The Government has released draft legislation implementing tax and regulatory reforms for employee share schemes (ESS), making it easier for businesses to offer ESS. These changes were foreshadowed in the 2021-2022 Federal Budget.
Under the current legislation, tax-deferred ESS schemes allows an employee to defer paying tax in relation to their ESS interests until the income year in which the deferred taxing point occurs, instead of paying tax in the year the interests are acquired.
Currently, under a tax-deferred ESS, the deferred taxing point is the earliest of:
- cessation of employment;
- in the case of shares, when there is no risk of forfeiture and there are no genuine restrictions on disposal;
- in the case of options, at the time the employee exercises the option and there is no longer a risk of forfeiting the resulting share or any genuine restrictions on disposal; and
- the maximum period of deferral of 15 years.
The draft legislation removes the cessation of employment taxing point and tax will be deferred until the earliest of the remaining taxing points. This is a welcome amendment and one that has been sought by tax practitioners for many years, particularly as many employees have not been able to realise value on their ESAS at the time their tax liability arises following termination of employment. This was principally due to other restrictions that applied to the ESS interests which would have otherwise deferred the taxing point.
Under the regulatory reforms, employers will not have to consider the Corporations Act 2001 (the Corporations Act) when making ESS offers, provided that they do not charge or lend to the relevant employees, and are not otherwise engaged in regulatory avoidance behaviors. Changes relative to what was consulted on previously include:
- completely removing requirements in the Corporations Act for ESS offers to employees who do not pay or incur debt to participate in these schemes;
- increasing the value cap, under which the Corporations Act requirements do not apply, from $5,000 to $30,000 for all other ESS offers of unlisted companies;
- consolidating exemptions and class order relief from disclosure, licensing, hawking, advertising and other obligations under the Corporations Act;
- expanding relief for unlisted companies to include contribution plans and limited or no recourse loans, where an employee can make a monetary contribution to acquire eligible financial products, and
- relaxing the requirements to lodge disclosure documents.
By removing these regulatory barriers, it will be easier and less costly for businesses to attract employees with ESS offers, in addition to wages.
The Exposure Draft Bill and Explanatory Memorandum for this measure is available on the Treasury website. Submissions for both measures will be accepted up until 25 August 2021.
Should you have any questions regarding this matter, please contact your Blaze Acumen advisor.