Tax and Superannuation Laws Amendment (Employee Share Schemes) Bill 2015

Bills Digest no. 92 2014–15

PDF version  [842KB]

WARNING: This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

Leslie Nielson, Economics Section
Jaan Murphy, Law and Bills Digest Section
6 May 2014

 

Contents

The Bills Digest at a glance
Purpose of the Bill
Structure of the Bill
Background
Committee consideration
Policy position of non-government parties/independents
Position of major interest groups
Financial implications
Statement of Compatibility with Human Rights
Key issues and provisions
Concluding comments

 

Date introduced:  25 March 2015
House:  House of Representitives
Portfolio:  Treasury
Commencement:  The day after Royal Assent.

Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill’s home page, or through the Australian Parliament website.

When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the ComLaw website.

The Bills Digest at a glance

The Tax and Superannuation Laws Amendment (Employee Share Schemes) Bill 2015 (the Bill) seeks to change the tax treatment of Employee Share Schemes (ESSs). The major changes are:

  • employees will be able to defer the taxing point in respect of options or rights granted under an ESS from 1 July 2015, even where there is no ‘real risk of forfeiture’ (provided certain conditions are met) until they exercise them (this can be compared to the current position where, generally, the taxing point is when such rights or options were first able to be exercised by the employee)
  • the maximum time for deferring tax is increased from seven to 15 years (prior to 2009 it was a maximum of ten years)
  • introducing a tax refund mechanism that will allow an employee who chooses not to exercise a right or option to obtain a refund of any income tax paid in respect of acquiring the right or option
  • increasing the significant ownership and voting rights thresholds that restrict eligibility for ESS tax concessions from five per cent to ten per cent
  •   introducing further concessions on ESS shares, rights and options issued by ‘start up companies’ that meet certain criteria and
  • allowing the Commissioner Taxation to approve optional safe harbour market valuation methods for valuing ESS interests (when they are first issued) by legislative instrument.

These changes are aimed at increasing the use of ESSs in Australia, especially in relation to small entrepreneurial start-up firms. One of the aims is to increase the number of such firms in Australia.[1]

Purpose of the Bill

The purpose of the Bill is to ‘soften’ the tax treatment of ESSs by amending the Income Tax Assessment Act 1997 (ITAA 1997) and other tax legislation to:

  • reverse some of the 2009 changes made to tax laws governing the operation of ESSs
  • introduce further tax concessions for employees of certain small ‘start-up’ companies, who offer an ESS and
  • support the Australian Taxation Office (ATO) in working with industry to develop and approve safe harbour valuation methods and standardised documentation to streamline the process of establishing and maintaining an ESS.[2]

Structure of the Bill

The Bill has one Schedule, divided into three parts:

  • Part one contains the main amendments, which make up the bulk of the Bill
  • Part two contains amendments concerning market value of assets or non-cash benefits and
  • Part three contains consequential and technical amendments.

Background

What is an Employee Share Scheme?

An ESS (sometimes referred to as an employee share option plan) is a scheme under which shares, stapled securities, or rights to acquire them in a company (so called ‘sweat equity’) are provided to an employee (or their associate) in relation to their employment, as a way of incentivising their involvement with the company.[3] ESSs can be divided into two categories:

  • broad based: where participation is open to at least 75 per cent of company employees and
  • narrow based: which only allow a smaller group of certain employees (usually executives) to participate.[4]

Nature and extent of Employee Share Schemes in Australia

Whilst the precise ‘nature and economic value’ and extent of ESSs in Australia is difficult to determine (due to the relative lack of detailed data),[5] the available evidence and recent studies nonetheless suggest that suggests that EESs ‘are increasingly prevalent and significant to the Australian economy’.[6] Further, it also appears that whilst the incidence of employee participation in ESSs in Australia is lower than in the United Kingdom and the United States, it is increasing.[7]

Research also indicates that anywhere between four and ten per cent of Australian businesses have some form of ESS, and this appears to be increasing over time.[8] For example, a study commissioned by the Commonwealth Department of Employment and Workplace Relations in 2004 found that:

  • ten per cent of Australian businesses had some form of employee share ownership and
  • four per cent of businesses surveyed had a ‘broad-based’ employee share plan (open to at least 75 per cent of employees).[9]

Data from the Australian Bureau of Statistics (ABS) indicates the number of employees receiving shares as a form of employment benefit (analogous to participation in an ESS) had increased from 1.3 per cent of employees in 1979 to 5.9 per cent of employees by 2004.[10] A 2009 study conducted into the ESS practices of companies listed on the Australian Stock Exchange (ASX) found that:

  • 57 per cent of respondent companies operated at least one broad-based employee share plan and significantly more companies had a broad-based ESS than a narrow-based ESS
  • over three quarters of companies with an ESS had adopted it since 2000 (confirming the trend of their increasing prevalence over time observed in other studies)[11]
  • the most common type of broad-based ESS were those structured to take advantage of the $1,000 tax exemption and
  • the most common type of equity offered under broad-based ESSs were options (around 49 per cent of ESSs), followed closely by shares (around 47 per cent of ESSs).[12]

As a result, ESSs appear to be an increasingly important part of the suite of incentives and benefits offered by employers to attract and retain employees, although (as discussed below) the motivations for doing so may differ.

Why do companies implement ESSs?

It has been observed that there ‘is a large body of literature which has proposed rationales’ for employee share ownership.[13] Importantly, these proposed reasons vary considerably and include:

  • improving workplace productivity
  • promoting workplace cooperation and harmony (through reducing the 'them' and 'us' mentality between employers and employees)
  • enhancing industrial democracy (by bringing employees into corporate governance)
  • increasing employees' understanding of how the economy is run
  •   providing employers and employees with greater flexibility in determining the nature and mix of remuneration packages
  • contributing to national savings through providing employees with an additional avenue for savings and investment
  • promoting innovation (particularly in small and medium unlisted companies and start-up companies or industries) and
  • facilitating succession planning in small businesses (by enabling employee buyouts).[14]

Whilst the reasons given by successive Governments for supporting ESSs have varied over time, the primary reason given for such support is the view that they align the interests of employees with those of their employer, so that employees benefit directly when the company does well and employers benefit through having a more committed and motivated workforce.[15] In part, this is thought to occur because participation in an ESS provides employees with a financial interest in the company they work for, through the distribution of shares in that company.[16] Those views were reiterated by the Minister when he introduced the Bill:

Employee share schemes offer employees a financial interest in the company they work for—aligning the interests of employees with the interest of their employers. This synchronicity of interests and objectives can drive innovation, entrepreneurship and enterprise success. Both shares and options provide employees with a direct interest in the performance of the firm. They can turn out to be very lucrative for employees of successful companies. [17] (emphasis added)

However, the reasons successive Governments have supported EESs, employers offer them and employees participate in them, whilst sharing some commonalities, vary. One study noted:

... there is a mismatch between the policy rationales of the government for its support of employee share ownership and the motivations of employees for participating in ESOPs [Employee Share Ownership Plans].[18]

In practice however, different motivations prevail. In a survey of Australian companies listed on the ASX, respondents (employers) were asked to agree or disagree about a number of reasons for setting up an ESS. The results are set out in Figure 1: employer reasons for having a broad-based ESS below, with the figures indicating the percentages of employer respondents agreeing or strongly agreeing with the listed reasons for providing a broad-based ESS.[19] Whilst aligning the interests of employees and shareholders was a frequently cited by employers as a reason to establish a broad-based ESS, it was only one of a number of reasons why employers set up an ESS, with the most popular being to show that they value their employees.

Figure 1 employer reasons for having a broad-based ESS

Figure 1 employer reasons for having a broad-based ESS 

In contrast, employees appear to have markedly different reasons for participating in an ESS than those underlying why employers offer them or Governments support them. One study that examined the attitudes of both participants and non-participants in their employer’s ESS found that most respondents characterised their ESS as ‘a way to share in company profits’ and very few indicated support for reasons suggesting that they saw their participation in an ESS as a way of aligning their interests with those of their employer, as set out in Figure 2: employee characterisations of ESSs and Figure 3: employee opinions on positive aspects of ESSs below.[20]

 

Figure 2: employee characterisations of ESSs

Figure 2: employee characterisations of ESSs  

As a result, whilst it appears that the reasons Governments support ESSs, employers offer them and employees participate in them continue to vary somewhat, it can be concluded that at the very least the Government’s view that ESSs ‘can turn out to be very lucrative for employees’ is aligned with the reason many employees choose to participate in an ESS, and in turn, with one of the main reasons employers offer them: to share in the financial success of the company. Whether this in turn leads to an alignment between employee and employer objectives is an open question, as discussed below.

Are Employee Share Schemes effective?

The extent to which the stated objectives of ESSs are being achieved can be gauged, in part, by the alignment (or lack thereof) of employee and employer objectives. One study observed that:

... a focus on the quality of their relationship with employees featured prominently as a rationale for why companies establish [ESSs]. This rationale also featured in the responses of employees, but not to the same extent.’[21]

This suggests that ESS are effective in aligning the interests of employees and employers, but not overwhelmingly so. On the other hand, given that many companies and employees both agree that an ESS is a way of sharing the companies’ financial success, it would appear that ESSs are effective as both a financial incentive to employees and a way of promoting flexible remuneration practices.[22]

Figure 3: employee opinions on positive aspects of ESSs

Figure 3: employee opinions on positive aspects of ESSs 

How are they taxed?

The taxation treatment of ESSs has changed over time. One of the main issues is the treatment of the discount to the normal price of shares or other securities that an employee receives under an ESS. The discount in relation to a share or right issued under an ESS arrangement is generally taken to be the difference between the market value of the share or right and any consideration paid by the employee to acquire the share or right. The discounted portion of the securities received is also subject to the capital gains tax (CGT) regime, once the ESS tax rules have been applied. Another issue is when the taxation liability arises. Table 1: Summary of ESSs taxation treatment under different Employee Share Schemes regimes (below) provides a useful summary of the pre-2009, post-2009 ESSs regimes and the changes proposed by the Bill.

Table 1: Summary of ESSs taxation treatment under different Employee Share Schemes regimes

Pre-2009 regime Post-2009 regime Proposed regime: all companies Proposed regime: start-up companies
Default position was up‑front taxation for both shares and options.

For qualifying shares[23] and options, subject to certain conditions, the employee could choose between up-front and deferred taxation. For options, a deferred taxation point occurred when the employee exercised the options by converting the options into shares.
Default position is up-front taxation for both shares and options.

Deferral of tax is limited to schemes where there is a risk of the employee forfeiting the shares or options, and schemes provided through salary sacrifice (up to $5,000, and subject to conditions).

The qualifying conditions are also applied to access deferral arrangements.

For options, a deferred taxation point occurs when there is no risk of forfeiture or when any restrictions on the sale or exercise of the options are lifted (vesting point).
Default position will remain up-front taxation for both shares and options.

However, option schemes will be able to access deferred taxation treatment more easily, without the options necessarily being at risk of forfeiture.

Further, for options, the deferred taxing point at vesting will be moved back to when the employee exercises the options.
Options and shares that are provided at a small discount by eligible start-ups will not be subject to up-front taxation.

Source: Australian Government, Department of Prime Minister and Cabinet, Industry Innovation and Competitiveness Agenda, 14 October 2014, p. 80 accessed 24 April 2015.

The pre-2009 regime

Former Division 13A of Part III of the ITAA 1936[24] and Sub-Division 130A of the ITAA 1997 (which deals with capital gains tax) created the regime for regulating the tax treatment of shares or rights acquired by an employee under an ESS, prior to the 2009 reforms.

The general rule was that shares or rights issued to an employee under an ESS were treated as a substitute for cash income or services, and thus tax was imposed, at the taxpayer’s marginal rate, at the time the right or share was acquired.[25] Importantly, the amount that was to be included in the employee’s assessable income was the amount of the ‘discount’ provided to the employee by the employer (that is, the difference between what they paid and the market value of the shares or option in question).[26] However, the pre-2009 regime provided two alternative concessions, whereby employees who received shares or options under an ESS could elect either to:

  • pay income tax on the ‘discount’ upfront and receive a $1,000 tax exemption (the exemption concession) or
  • defer paying income tax on the ‘discount’ for up to ten years (the deferral concession).[27]

In order to be eligible for either of the two concessions, the shares or rights issued under the ESS had to satisfy a number of conditions. These included that the share or right was:

  • acquired under an ESS
  • in the company which is the employer of the taxpayer (or in the holding company of the employer company)[28] and
  • consisted of ordinary shares or rights to ordinary shares (and in some circumstances, ‘stapled securities’).[29]

In addition to the above conditions, the pre-2009 regime also limited the availability of the tax concessions to circumstances where the employee had control over (or was in a position to cast, or control the casting of) less than five per cent of the maximum number of votes that might be cast at a general meeting. Further, at least 75 per cent of `permanent employees'[30] must have been entitled to participate in the ESS (or another scheme). Provided all these conditions were met, the employee could claim either the exemption concession or the deferral concession, provided further conditions were met, as discussed below.

Exemption concession

In order to be eligible for the exemption concession under the pre-2009 regime, it was also necessary to satisfy three additional criteria:

  • the ESS did not have any conditions that could result in any recipient forfeiting ownership of shares or rights acquired under it
  • the ESS operated to provide that an employee could not dispose of a share or right for a minimum of period of three years after its acquisition (or when the employee ceased to be employed by the employer) and
  • the ESS and any related scheme for the provision of finance (such as salary sacrifice) be operated on a non‑discriminatory basis.[31]

An employee who met the above criteria could then elect to have the ‘discount’ included in their assessable income in the year in which the shares or rights were acquired and, additionally, receive $1,000 worth of ‘discount’ tax-free.[32] In other words, they did not pay any tax on first $1,000 worth of ‘discount’ they received under an ESS.

Deferral concession

In order to be eligible for the deferral concession under the pre-2009 regime, the ESS must have imposed:

  • restrictions preventing the employee from disposing of the shares or rights, or
  • conditions that could result in forfeiture[33] and
  • the employee did not elect to be taxed up-front.[34]

In such cases, tax would be imposed when the restrictions ended, on disposal, when employment ended or ten years after the rights or shares were obtained under the ESS (whichever was the earliest).[35] The attractiveness of this option was the fact that, as a matter of practice, it allowed many employees to obtain the benefit of the 50 per cent capital gains tax (CGT) discount on disposing of assets (in this case shares or rights) held for more than 12 months.[36] However, one problem posed by the pre-2009 deferral concession was that a liability to pay tax could arise before the employee had received any real benefit.[37]

The pre-2009 regime in practice

Evidence suggests that some employees chose not to take advantage of either concession. Instead, some employees elected to pay tax up-front on the ‘discount’, and to then obtain the benefit of the 50 per cent CGT discount on disposal of the shares or rights at a time of their choosing. Further, such an option was much more attractive to senior executives than the $1,000 exemption (it would appear due in part to the increased flexibility offered by such an option).[38]

Further, the pre-2009 regime allowed a company to operate different schemes, for example by offering both broad-based and (more generous) narrow-based ESSs for shares and a (generous) narrow-based ESS for options.[39]

Whilst many of these conditions carried over into the post 2009 arrangements (for example, limiting the availability of the tax concessions to circumstances where the employee had control over (or was in a position to cast, or control the casting of) less than five per cent of the maximum number of votes that might be cast at a general meeting), a number of significant changes were introduced.

Post 2009 regime

Schedule 1 of the Tax Laws Amendment (2009 Budget Measures No.2) Act 2009 (the 2009 Act) inserted Division 83A into the ITAA 1997.[40] This new Division contains the post-2009 tax treatment of ESSs outlined below (that is, the provisions that currently apply to ESS).

The relevant provisions of the ITAA 1936 that had previously governed ESSs were repealed by the 2009 Act. Division 83A of the ITAA 1997 received Royal Assent on 14 December 2009, replacing the previous rules contained in Division 13A of the ITAA 1936. Division 83A applies to ESS interests acquired for a discount on or after 1 July 2009.

As discussed above, prior to the changes made by the 2009 Act (which were controversial at the time[41]) employees could elect the tax treatment which they wished to apply to shares or rights they received. However, from 1 July 2009 employees are no longer able to choose whether to be taxed upfront or at a later time. Rather, the terms and structure of the ESS itself determine whether the employee is taxed upfront or have their tax obligations deferred.[42]

Exemption concession

Under the post-2009 regime, all ESSs defaulted to being taxed upfront. However, a form of the $1,000 tax concession was retained. It is available to all employees who pay tax on the ‘discount’ upfront where (amongst other things):

  • the employee’s ‘adjusted taxable income’ is $180,000 or less, and
  • the ESS is open to at least 75 per cent of employees and
  • the shares or rights are required to be held for three years.[43]

Deferral concession

Under the post-2009 regime, the deferral concession is only available if the:

  • the shares or rights acquired under the ESS are subject to a ‘real risk of forfeiture’ or
  • the shares or rights acquired under the ESS are acquired via a salary sacrifice arrangement and the employee receives no more than $5,000 worth of shares per income year under those arrangements, and
  • a range of other conditions are met.[44]

The period for deferral of tax under the ESS rules also changed in 2009. Under the current rules, after a 30 day holding period, tax can be deferred to the earliest of:

  • the point where the real risk of forfeiture stops (or where there are no restrictions on disposal)
  • seven years after the employee acquired the shares or rights or
  • when the employee ceases employment.[45]

The post-2009 regime in practice

As noted in the Bill’s Explanatory Memorandum, in practice there are different types of ESSs that any employer may offer:

  • taxed-upfront ESSs (not eligible for reduction)
  • taxed-upfront ESSs (eligible for $1,000 reduction)
  • tax-deferred ESSs (involving salary sacrifice) and
  • tax-deferred ESSs (where there is real risk of forfeiture).[46]

The foregoing has been a brief introduction to the pre and post 2009 tax arrangements applying to ESS schemes.

Insights from Tax Statistics

The Australian Taxation Office only publishes ESS statistics for the 2009-10 tax year onwards. The latest available data finishes in the 2012-13 tax year, and only relates to the discounts taxed under the ESS regime. The following table gives the total number of ESS discounts assessed by the ATO for these years, and the proportions that arose under various categories:

Table 2: ESS discounts subject to tax 2009-10 to 2012-13

Year 2009-10 2010-11 2011-12 2012-13
Number of total ESS assessable discounts* 140,965 233,160 252,560 283,010
% of ESS discounts from taxed upfront schemes eligible for $1,000 reduction 60% 66% 65% 62%
% of ESS discounts from taxed upfront schemes not eligible for $1,000 reduction 8% 5% 5% 4%
% ESS discounts from deferral schemes 3% 11% 16% 26%
% of ESS discounts from interests acquired pre 1 July 2009 29% 19% 14% 7%
Source: Taxation Statistics, Individual Tax, Table 1, 2012-13[47]

*Does not include TFN withheld discounts or foreign scheme discounts, but does include pre 1 July 2009 interests

This table suggests that the majority of the ESS discounts included in assessable income arose from ESS interests subject to tax when first granted. It is likely that these interests were not able to be sold for at least three years after their granting. Whether this was a hardship may depend on the value of these interests. The following table gives the average tax value of these ESS interests, for these years:

Table 3: Average value of ESS interests, by category, $

Year 2009-10 2010-11 2011-12 2012-13
ESS discounts from taxed upfront schemes eligible for $1,000 reduction 1,009 1,108 996 938
ESS discounts from taxed upfront schemes not eligible for $1,000 reduction 13,295 9,916 7,946 10,203
ESS discounts from deferral schemes 24,789 22,905 24,926 27,070
ESS discounts from interests acquired pre 1 July 2009 34,698 40,487 35,745 39,288
Source: ATO Tax Stats, Individual Tax, Table 1, 2012-13

As stated above, to be eligible for the $1,000 reduction the shares have to be held for three years. While the majority of the ESS interests assessed by the ATO fall into this category, they are of comparatively low value. That said, such taxpayers must find the required amount of tax from sources other than selling these ESS interests.[48]

What are the perceived problems with the 2009 changes?

The main industry group promoting the use of ESS arrangements in Australia has outlined the problems arising from the operation of Division 83A of the ITAA 1997, as follows:

  • ESS reporting alone could have achieved the desired outcomes (the 2009 changes were heavy handed)
  • Division 83A of the ITAA 1997 has increased companies’ compliance costs and added an additional level of complexity to plan administration
  • broad based ESSs have been impacted the most by the changes:
    • over 90 per cent of plans were suspended during the first year (2010) and 30 per cent of plans were suspended for up to two years. Of the 30 per cent of plans suspended for two years many have not been reinstated and –      the $5,000 salary sacrifice limit imposed under Division 83A has had the greatest impact on broad based employee groups, middle management and employee savings plans. There has been a noticeable decline in the amounts that are contributed to salary sacrifice employee share ownership plans as a direct result of the provisions in Division 83A and, in particular, the $5,000 cap
  • employee share option plans have also been significantly impacted by the changes
  • Division 83A has led to a decline in International Plans offered in Australia
  • a key concern in the former legislation has not been addressed – being tax at termination of employment and
  • there is still uncertainty about some aspects of the legislation.[49]

Whilst it is difficult to verify many of the above claims (given the lack of data on ESSs generally), a number of commentators have echoed those concerns. For example, one commentator summarised the impact of the reforms introduced by the 2009 Act in the following terms:

The reforms, however, came with significant collateral damage. Start-ups and other small to medium sized companies relying on the use of ESSs to recruit and retain talent in lieu of competitive ‘real dollar’ salaries were hit hard, with employees being faced with upfront tax liability at the time they received the shares and again also whenever a vesting point was reached in respect [of] their options. In other words, tax liability would be triggered at the time of issue and not at some later time when the benefit of the share was derived or the share itself was disposed of. The resulting effect was an almost instantaneous diminution in the value of using an ESS in the eyes of employers and employees. In a survey conducted by Deloitte in early 2013, it was found that over 80% of respondent employers agreed that the adverse tax treatment was the main consideration in their reluctance to participate in an ESS.[50] (emphasis added)

Likewise, another commentator from one of Australia’s largest law firms noted that ‘not surprisingly, the 2009 tax changes largely resulted in companies ceasing to grant options with an exercise price to Australian employees’ and that the changes introduced by the 2009 Act were ‘completely out of step with the 'global norm' of options being taxed on exercise’.[51]

Despite the concerns expressed above however, it is worth noting that the value of the ESS discounts assessed for tax purposes increased between 2009–10 to 2012–13. Of course, this is barely a long enough period to suggest any trend, but at least for these years ESS activity appears to have been increasing, despite the changes introduced by the 2009 Act.

Government’s view

In the second reading speech to the Bill the Government made the following points in relation to problems arising from existing arrangements:

  • often a person is forced to pay tax on an ESS ‘discount’ before they can realise that asset
  • the use of option-based ESSs has effectively halted
  • the current arrangements are not competitive by international standards, thereby reducing the incentive for talented staff to come to Australia and work (particularly work in high tech start-up firms) and
  • the current arrangements are overly complicated to set up and cost far more to implement than similar overseas arrangements.[52]

Policy Development

Announcement

This measure was first announced on 14 October 2014 in the Government’s Industry Innovation and Competitiveness Agenda.[53]

Consultation

Tax law policy development and implementation is complex, and can have significant unintended consequences. Thus it is essential the Government, in developing new policy, consults widely with key stakeholders and interest groups. Steps in the development of the current Bill include:

  • on 12 June 2013, the former Government released Advancing Australia as a Digital Economy: An Update to the National Digital Economy Strategy, which recognised that more could be done to support Australian start-ups by reducing the cost and complexity of administering ESSs.[54] In this document the former Government undertook to review the tax treatment of ESSs and a consultation was undertaken by Treasury, which reported back in December 2013.[55] This work was superseded by subsequent consultations
  • on 21 January 2014, Treasury issued an invitation to comment on specific ESS issues, including the impact of the above mentioned 2009 changes to ESS taxing arrangements[56]
  • on 23 May 2014, Treasury announced that the submissions and consultations arising from the preceding announcement would be considered by the Prime Minister’s task force to develop a National Industry Investment and Competitiveness Agenda[57] and
  • on 14 January 2015 an exposure draft of the legislation was released by Treasury.[58] Some of the submissions made in response to this draft legislation have been published on the internet by those making them.

The Explanatory Memorandum to the Bill contains further details on the consultation process.[59]

Committee consideration

Senate Selection of Bills Committee

In its Fourth Report for 2015 this Committee deferred consideration of this Bill until its next meeting.[60]

Senate Standing Committee for the Scrutiny of Bills

As at the date of writing, this Committee had not yet examined the Bill.

Parliamentary Joint Committee on Human Rights

As at the date of writing, the Parliamentary Joint Committee on Human Rights has not considered the Bill.

Policy position of non-government parties/independents

In response to the Government’s release of the above mentioned Industry Innovation and Competitiveness Agenda, the Shadow Minster for Communications supported the Agenda’s emphasis on reforming current ESS taxing arrangements.[61]

Position of major interest groups

A recent press article suggested that the Bill is strongly supported by some small start-up firms.[62] A not-for-profit organisation that seeks to foster technology entrepreneurship in Australia, #StartupAUS, welcomed both the announcement of changes to ESS provisions in the Government’s Industry Innovation and Competitiveness Agenda, and the introduction of the Bill.[63]

Employee Ownership Australia and New Zealand (EOANZ), while welcoming the announcement of the Government’s Industry Innovation and Competitiveness Agenda considered that some of the provisions in that announcement were unduly restrictive. For example, EOANZ expressed the view that restricting the availability of tax concessions to employees who ‘do not own or control’ more than five per cent of the company’s shares was ‘inappropriate... in the start-up context’. EOANZ subsequently recommended that ‘the new tax rules should consider this limitation and look to ensure there is an appropriate carve out for start‑up companies’.[64] Briefly, this limit was reconsidered and increased to ten per cent. EOANZ does not appear to have commented on the Bill itself.

The Australian Industry Group, though welcoming the Government’s Industry and Competitiveness Agenda had some concerns that the ESS eligibility criteria may be too tight and needed to consult with member businesses on the design of the program.[65] The Group has not made any further comments on this matter.

The Australian Chamber of Industry and Commerce welcomed the release of the draft legislation in January 2015 and supports the changes contained in the draft Bill.[66] It has not made further comment on the Bill since January. There was widespread support for the proposed changes amongst the accounting and tax community.[67] In addition, a number of major law and accounting firms have indicated that they viewed either the draft legislation or the Bill itself in a positive light.[68] However, there are some criticisms of the proposed changes including:

  • the retention of cessation of employment as a taxing point (regardless of whether the employee can realise the ESS interest at that time) places Australia ‘out of step’ with many other developed countries
  • the failure to increase the $1,000 exemption for qualifying schemes
  • the conditions attached to the start-up concession scheme may not provide a substantial boost to the start‑up sector and
  • there are still circumstances in which employees of certain types of private companies may be required to pay tax in circumstances where they are not easily able to realise any financial benefit.[69]

Financial implications

The Explanatory Memorandum states that the Bill will have a negative impact on revenue of $196m over three years, as set out in the following table:[70]

Table 4: Financial Impact

Year 2015-16 2016-17 2017-18
Amount $m -52 -56 -88

If the changes in this Bill are successful the annual financial impact may continue to increase in the years beyond 2017–18.

Statement of Compatibility with Human Rights

As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bill is compatible.[71]

Key issues and provisions

As discussed above, Division 83A of the ITAA 1997 deals with ESS.[72]

Section 83A-5 sets out the objects of Division 83A. Item 2 of Schedule 1, Part 1 inserts new paragraph 83A-5(c) into the ITAA 1997 emphasising that an additional objective of the ESS provisions is to increase the number of new entrepreneurial companies in Australia.

These new entrepreneurial firms are most likely to be in the Small and Medium (SME) company sector of the economy. There are a number of benefits from promoting the SME sector, as the following quote suggests:

SMEs are crucial to the social and economic health of local, regional and national communities. As the mining boom naturally evolves from investment to production, SMEs will increasingly drive future economic growth. Their adaptability and flexibility allows the exploitation of niche markets and embrace of new technology. SMEs can enter and exit markets more nimbly in response to fluctuations of price and demand, thereby boosting competition, increasing choice, delivering value and forcing existing firms to improve.[73]

Thus, the impact of changes to the ESS regime proposed by the Bill, if they meet the above objective, may have an economic impact well beyond the companies offering these schemes to their employees.

Generally, the value of an ESS interest upon acquisition is its market value under existing section 83A-30 of the ITAA 1997. Item 5 adds proposed subsection 83A-30(2) that states this this rule does not apply to an ESS interest consisting of rights to shares if proposed section 83A-33 (which introduces the new start-up concession) reduces the amount of assessable income arising from this interest. The value for taxation purposes may be worked out under a method jointly developed by industry and the Commissioner for Taxation. Commentary on item 46 below contains further details.

Changes to maximum ownership and voting rights

Item 11 inserts proposed section 83A-45 into the ITAA 1997. Proposed subsection 83A‑45(6) will increase the amount of a company’s capital that an individual seeking to access an ESS tax concession can hold from five to ten per cent. This is a significant change from the current rules.

New deferral concession arrangements

As noted earlier in this Digest, currently, the taxation liability associated with acquiring rights or options under an ESS arises at the time the options or rights vest in the employee. As a result, a taxation liability can arise even where no benefit has been realised.

Items 18 to 22 of the Bill introduce the new deferral concession arrangements. They provide that employees who acquire options or rights under an ESS (that meets certain criteria) will be able to defer taxation on those rights or options until they are exercised. The amendments are designed to prevent situations arising where an employee is taxed before they realise a financial benefit, and instead will allow an employee to defer their tax liability until they have realised a financial benefit.

The criteria that need to be met are set out in sections 83A-35 and 83A-105 of the ITAA 1997, as amended by items 8 to 10 and 15 to 18 of the Bill and proposed section 83A-45 (at item 11). First, the rights or options acquired under the ESS must be subject to a ‘real risk of forfeiture’ or alternatively, at the time the rights or options were acquired the ESS must:

  • have been acquired when the employee was employed by the company (or a subsidiary of it)[74]
  • have ‘genuinely restricted’ immediate disposal of the rights or options and
  • the governing rules of the ESS ‘expressly stated’ that tax deferral treatment applies to it.[75]

The remaining criteria that must be satisfied before the deferral concession can be accessed include that:

  • the ESS entitles at least 75 per cent of permanent Australian employees of at least three years’ service to participate in it[76]
  • the company issuing the ESS interest does not have as its predominant business the acquisition, sale or holding of shares, securities or other investments[77]
  • the shares (or rights to shares) able to be acquired under the ESS are ordinary shares and the employee seeking to access the concession does not own (or has voting power to control) more than ten per cent of the company offering the ESS[78] and
  • the shares or rights acquired under the ESS via a salary sacrifice arrangement do not exceed more than $5,000 worth of shares per income year under those arrangements.[79]

Item 19 extends the maximum deferral time from seven years to 15 years. Further, item 18 provides that tax deferral applies to rights or options acquired under an ESS even where there is no real risk of forfeiture (provided certain other criteria are satisfied). As noted earlier in this Digest, previously a real risk of forfeiture was required before the deferral concession could be accessed.

Exemption concession arrangements

The Bill does not alter the existing exemption concession arrangements, other than making consequential amendments to give effect to the start-up concession scheme provisions (SUCS). As a result, the exemption concession will remain available where:

  • the employee’s ‘adjusted taxable income’ is $180,000 or less
  • the ESS entitles at least 75 per cent of permanent Australian employees of at least three years’ service to participate in it[80]
  • the shares or rights are required to be held for the minimum holding period (at least three years, subject to certain exemptions)[81] and
  • the shares (or rights to shares) able to be acquired under the ESS are ordinary shares and the employee seeking to access the concession does not own (or have voting power to control) more than ten per cent of the company offering the ESS.[82]

However, whilst not significantly reforming the exemption concession arrangements themselves, when viewed in the context of the proposed deferral concession arrangements and the proposed start-up concession scheme (SUCS), the Bill as a whole introduces a high level of flexibility into the overall ESS taxation regime.

New refund rules for forfeited shares, rights and options

Under the current arrangements (introduced by the 2009 Act), no refund of tax paid on rights or options to acquire shares which vested but then later lapsed is available. Instead, a capital loss is available on the lapse of the rights or options. As a result, under the current arrangements an employee may pay tax on forfeited or lapsed rights or options without ever realising a financial benefit.

The changes proposed by items 28 to 30 will provide that a taxpayer will be entitled to a refund of income tax paid in relation to discounted ESS interests in certain circumstances, provided those interests were forfeited and the employee has already been taxed on the discount. Paragraphs 1.64 to 1.68 of the Explanatory Memorandum adequately explain the proposed changes.[83]

Retrospective change to premium priced options

Currently if an option or right acquired under an ESS has a nil taxable value (that is, the price paid is significantly greater than the market value of a share, right or option when acquired), the ESS tax provisions do not apply. Instead, if the option or right had a 'real' market value, there was a technical risk that fringe benefits tax could apply to the rights, options or shares acquired.[84]

Items 47 to 50 of the Bill provide that such circumstances fall within the ESS tax provisions. Item 51 provides that these changes will apply retrospectively from the 2011-12 income year onwards. The effect of the amendments proposed by items 47 to 50 is that where:

  • options or rights (or shares acquired under such rights or options) have a nil taxable value on acquisition under the tax valuation tables, but
  • have a market value on acquisition greater than nil
  • they will now be taxable on acquisition.

As a result, the market value will set the cost base of the interest acquired under the ESS for CGT purposes, instead of including an amount in the taxpayer’s assessable income. As a result, only CGT should apply, instead of income tax.[85]

The start-up concession

Where the conditions discussed below are met, the discount on an ESS interest issued by a start-up company (as defined in proposed subsections 83A-33(2) to (4)) is not included in an employee's assessable income. This is termed the small start-up concession.[86] The benefit provided by the proposed amendments is that in effect, the discount provided by the ESS is tax-free (as opposed to being subject to income tax under non-SUCS ESSs). However, CGT will apply on disposal of any shares acquired under a SUCS compliant ESS (as discussed below).

Item 6 inserts proposed section 83A-33 into the ITAA 1997, which allows a recipient to reduce their assessable income arising from the receipt of an ESS interest by the value of that interest (providing certain conditions are met). First, a number of conditions related to the start-up company itself must be met:

  • the equity interests in the company, or any of its subsidiaries or related holding companies are not listed on a stock exchange (with some exceptions for venture capital companies, as noted below)
  • the relevant company (and any of its subsidiaries or related holding companies) has been incorporated for less than ten years
  • the company must have an aggregated annual turnover less than $50 million (with some exceptions for venture capital companies, as noted below) and
  • the company employing the person receiving the ESS interest must be an Australian resident company.[87]

Second, a number of conditions related to the ESS itself must also be satisfied. This includes that where the ESS interest consists of shares in the relevant company, the value of the ESS interest received is provided at no more than a 15 per cent discount on the market value of the ESS interest. Further, where the ESS interest consists of rights or options to obtain shares, the amount that must be paid to exercise that right is greater than or equal to the market value of an ordinary share in the company when that interest was received.[88]

In addition, the ESS must be available to at least 75 per cent of the permanent employees who have completed at least three years of service (whether continuous or non-continuous) and who are Australian residents (that is, it must be a broad based scheme) (see existing subsection 82A-105(2)). Finally, the additional conditions in proposed section 83A-45 must also be satisfied:

  • the company issuing the ESS interest does not have as its predominant business the acquisition, sale or holding of shares, securities or other investments[89]
  • the shares (or rights to shares) able to be acquired under the ESS are ordinary shares and the employee seeking to access the concession does not own (or have voting power to control) more than ten per cent of the company offering the ESS[90] and

the ESS provides the required minimum holding period.[91]

The minimum holding period is defined in proposed subsection 83A-45(5) as the earlier of:

  • three years starting from the date the ESS interest was first acquired
  • an earlier time (as the Commissioner for Taxation allows) or
  • when the employee ceases being employed by the relevant employer.

These conditions are consistent with the objectives of the ESS rules noted in item 2, namely to ‘increase the number of new entrepreneurial companies in Australia by assisting them to attract and retain employees providing those employees with a tax concession for acquiring shares under such schemes.’[92]

Venture capital exemption

Proposed subsection 83A-33(7), at item 6, allows the exclusion of eligible venture capital investments by Venture Capital Limited Partnerships (VCLP), Early Stage Venture Capital Limited Partnerships (ESVCLP) or Australian Venture Capital Fund of Funds (AFOF) from the requirements that an ESS be an unlisted interest and the restriction to companies that have an annual turnover of less than $50m. Investments by Deductable Gift Recipients are also exempt from these conditions.[93]

Some of these conditions are controversial. The application of these provisions only to unlisted interests has been seen as unduly restrictive, as the following quote suggests:

It ought not be assumed that listed companies have ready access to capital. Many have listed to fund R&D projects and are yet to make profits. They remain start-ups in every sense. Nor will the new regime permit concessional treatment of already embedded value, only growth in value (except to the limited extent of the proposed small share discount exemption), so it is incidental that stock exchange pricing indicates at least some already established value... [i]t is hard to see a justification. If otherwise a company satisfies the start-up criteria, why would quotation of its shares change its character? A significant practical effect of this rule would be to disqualify highly innovative sources of future growth for our economy. We submit there is no reason to discriminate against listed companies. They should be dealt with as any other start-up.[94]

While supporting the proposed changes, the Australian Institute of Company Directors considered that restricting the deductibility of the value of ESS interests to those schemes that are broad based unduly restricts the way in which these companies may design remuneration arrangements for executives and employees. The Tax Institute considered that this condition should be removed.[95]

Other provisions

Integrity measures

Items 9 and 14 insert proposed paragraphs 83A-35(2)(c) and 83A-105(1)(ab). These insertions are important integrity measures which ensure that a taxpayer can’t claim an exemption concession in relation to an ESS interest under both existing section 83A-35 of the ITAA 1997 and the proposed SUCS (proposed section 83A-33).

Consolidation of conditions governing access to ESS tax concessions

Item 10 repeals several existing conditions governing the reduction in a person’s assessed income arising from the receipt of an ESS interest, contained in section 83A-35 of the ITAA 1997, as detailed in Table 5: Conditions governing access to ESS tax concessions below. It should be noted they are effectively replicated in proposed section 83A-45.

Table 5: Conditions governing access to ESS tax concessions

Existing provision repealed by item 10
Replacement provision
83A-35A(3) – requirement to be employed by the company issuing the ESS interest, or a subsidiary of that company Proposed subsection 83A‑45(1)
83A-35(4) – requirement that the ESS interest consist only of ordinary shares, this allows options to be included in an ESS interest Proposed subsection 83A‑45(2)
83A-35(5) – requirement that the company employing the recipient not be a company whose predominant business (whether or not stated in its constituent documents) is the acquisition, sale or holding of shares, securities or other investments Proposed subsection 83A‑45(3)
83A-35(8) – requirement that the ESS interest be held for a minimum of three years or until ceasing employment with the issuing company Proposed subsections 83A-45(4) and (5).
83A-35(9) – ESS tax concessions are not available where the employee owns (or has voting power to control) more than five per cent of the company offering the ESS Proposed subsection 83A‑45(6), which increases the limit to ten per cent.

Changes to application of capital gains tax

Item 31 modifies the table in existing subsection 115-30(1) of the ITAA 1997, the main effect of which is that for CGT purposes, where the ESS consists of rights to purchase shares that benefited from the SUCS, the time that an ESS was acquired is the time it was issued, not when the rights to acquire those shares were exercised. This amendment will provide that the CGT discount is available where the right and underlying share are sequentially held for 12 months or more. In effect, it will allow the period from which the CGT discount is calculated to commence at the earlier time of the acquisition of the right or option, instead of the shares themselves.

Currently, under section 768-915 of the ITAA 1997 a capital gain or loss is disregarded for temporary residents in certain circumstances. Item 38 inserts proposed subsection 768-915(2) with the effect that that general rule does not apply were the SUCS applies (proposed section 83A-33) to the ESS interest and a CGT event I1 occurs (that is, the individual or company ceases to be an Australian resident for tax purposes).

Safe harbour valuation methods

One of the policy features of this initiative is that the Commissioner for Taxation may work with industry to develop and approve safe harbour valuation methods to improve certainty and reduce compliance costs in maintaining an ESS. To this end, item 46 inserts proposed section 960-412 into the ITAA 1997 that allows the Commissioner to approve methods of working out the market value of assets or non-cash benefits. This approval will require a disallowable legislative instrument.[96] There is nothing in this proposed section that restricts its application to the valuation of ESS interests. It is worth noting that the ATO has already carried out consultations regarding the development of safe harbour valuation methods.[97]

Item 34 adds proposed paragraph 130-80(4)(c) to the ITAA 1997 so that the general market value substitution rules for CGT purposes (existing sections 112-12 and 116-30) do not apply to ESS interests whose impact on a taxpayer’s assessable income has been determined under the SUCS (proposed section 83A-33). Their value for tax purposes may be worked out by a special method jointly developed by industry and the Commissioner for Taxation (see item 46, above).

Concluding comments

Readers should not assume that the reform of tax provision relating to employee share schemes will, by itself, cause an increase in the number of smaller innovative start-up companies. Rather, the implementation of ESS tax provisions that make arrangements of this sort more attractive is but one element in overall arrangements to stimulate this type of activity. As such, every bit helps.

Members, Senators and Parliamentary staff can obtain further information from the Parliamentary Library on (02) 6277 2500.




[1].         See: proposed paragraph 83A-5(c) of the Income Tax Assessment Act 1997, inserted by item 2 of the Bill; Explanatory Memorandum, Tax and Superannuation Laws Amendment (Employee Share Schemes) Bill 2015, pp. 4–5, 6, 31 and 33, accessed 27 April 2015; B Billson, ‘Second reading speech: Tax and Superannuation Laws Amendment (Employee Share Schemes) Bill 2015’ House of Representatives, Debates, 25 March 2015, pp. 3361, accessed 27 April 2015.

[2].         Explanatory Memorandum, Tax and Superannuation Laws Amendment (Employee Share Schemes) Bill 2015, pp. 3 and 5, accessed 20 April 2015.

[3].         Australian Taxation Office (ATO), ‘Employee share schemes’, ATO website, 23 January 2015, accessed 25 March 2015: Stapled securities are created when two or more different securities are legally bound together so that they cannot be sold separately (Australian Securities and Investment Commission, Moneysmart, ‘Stapled securities’, accessed 6 May 2015) Many different types of securities can be stapled together. For example, many property trusts have their units stapled to the shares of companies with which they are closely associated. See also: W Kalinko, Taxing unlisted shares – the impact on Australian innovation, submission to Treasury on the Reform of the Taxation of Employee Share Schemes, Department of Treasury website, 12 June 2009, p. 2, accessed 20 April 2015.

[4].         I Landau, A O’Connell and I Ramsay, ‘Employee share schemes: regulation and policy’, Australian Tax Forum, 25(10), 28 September 2010, pp. 459–476, p. 460, accessed 20 April 2015.

[5].         House of Representatives Standing Committee on Employment, Education and Workplace Relations, Shared Endeavours, Inquiry into employee share ownership in Australian enterprises, The House of Representatives, Canberra, September 2000, p. xxvi where it was noted that: that ‘very little is known about the nature, size and extent of employee share plans. The reason is that information is not systematically collected by any single department or agency of the Executive Government.’ However, the Australian Taxation Office (ATO) has collected tax relevant data on ESSs from the 2009–2010 tax year. Latest tax statistics only cover the period from 2009–10 to 2012–13.

[6].         I Landau, A O’Connell and I Ramsay, ‘Employee share schemes: regulation and policy’, op. cit., pp. 460–461; I Landau, R Mitchell, A O’Connell, I Ramsay and S Marshall, ‘Broad-based employee share ownership in Australian listed companies survey report’; University of Melbourne Legal Studies Research Paper, 412, April 2009, p. 5; A O’Connell, ‘Employee share ownership plans – a comparative report’, Research report, Employee Share Ownership Project, Melbourne Law School, The University of Melbourne, September 2011, p. 1, accessed 22 April 2015.

[7].         A O’Connell, ‘Employee share ownership plans – a comparative report’, op. cit., pp. 1, 5; I Landau, A O’Connell and I Ramsay, ‘Employee share schemes: regulation and policy’, op. cit., pp. 460–461.

[8].         A O’Connell, ‘Employee share ownership plans – a comparative report’, op. cit., pp. 1, 5; I Landau, A O’Connell and I Ramsay, ‘Employee share schemes: regulation and policy’, op. cit., p. 461; citing TNS Social Research, Employee Share Ownership in Australia: Aligning Interests (Executive Summary), report prepared for the Department of Employment and Workplace Relations (DEWR), DEWR, Canberra, 2004, pp. 4–5.

[9].         I Landau, A O’Connell and I Ramsay, ‘Employee share schemes: regulation and policy’, op. cit., pp. 460–461.

[10].      Ibid, citing Australian Bureau of Statistics (ABS), Spotlight: Employee Share Schemes, Australian Labour Market Statistics, cat. no. 6105.0, ABS, Canberra, 2005, p. 1, accessed 22 April 2015.

[11].      See for example: I Landau, A O’Connell and I Ramsay, ‘Employee share schemes: regulation and policy’, op. cit., pp. 460–461.

[12].      I Landau, R Mitchell, A O’Connell, I Ramsay and S Marshall, ‘Broad-based employee share ownership in Australian listed companies survey report’; University of Melbourne Legal Studies Research Paper, 412, April 2009, pp. 1–2; M Brown, R Minson, A O’Connell and I Ramsay, ‘Employee Participation in Employee Share Ownership Plans: The Law, Company Objectives and Employee Motives’, Australian Journal of Labour Law, 25(1), 2012, pp. 3–4, accessed 22 April 2015.

[13].      M Brown, R Minson, A O’Connell and I Ramsay, ‘Employee Participation in Employee Share Ownership Plans: The Law, Company Objectives and Employee Motives’, op. cit., p. 20.

[14].      M Brown, R Minson, A O’Connell and I Ramsay, ‘Employee Participation in Employee Share Ownership Plans: The Law, Company Objectives and Employee Motives’, op. cit., p. 20, citing I Landau, R Mitchell, A O’Connell and I Ramsay, 'Employee Share Ownership in Australia: Theory, Evidence, Current Practice and Regulation', UCLA Pacific Basin Law Journal, 25(1), 2007, pp. 30–36; accessed 22 April 2015; Senate Economics References Committee, Employee Share Schemes, The Senate, Canberra, August 2009, paras [4.1]-[4.13], accessed 22 April 2015; Australian Government, Treasury, Reform of the Taxation of Employee Share Schemes, Consultation paper, June 2009, p. 6, accessed 22 April 2015.

[15].      I Landau, A O’Connell and I Ramsay, ‘Employee share schemes: regulation and policy’, op. cit., pp. 468–469; Explanatory Memorandum, Tax and Superannuation Laws Amendment (Employee Share Schemes) Bill 2015, op. cit., para [1.34], p. 11. See also: The House of Representatives Standing Committee on Employment, Education and Workplace Relations, Shared Endeavours, Inquiry into employee share ownership in Australian enterprises, The House of Representatives, Canberra, September 2000, recommendation 5, and para [2.78], where the Howard Government and the then Labor Opposition, whilst both outlining different reasons for supporting ESSs, both articulated the view that they fostered the alignment of employee/employer interests.

[16].      Australian Government, Treasury, Reform of the Taxation of Employee Share Schemes, Consultation paper, op. cit., p. 6.

[17].      B Billson, ‘Second reading speech: Tax and Superannuation Laws Amendment (Employee Share Schemes) Bill 2015’ House of Representatives, Debates, 25 March 2015, pp. 3358, accessed 27 March 2015.

[18].      M Brown, R Minson, A O’Connell and I Ramsay, ‘Employee Participation in Employee Share Ownership Plans: The Law, Company Objectives and Employee Motives’, op. cit., p. 3.

[19].      I Landau, R Mitchell, A O’Connell , I Ramsay and S Marshall, ‘Broad based employee share ownership in Australian listed companies: an empirical analysis’, Australian Business Law Review, 37(6), December 2009, p. 420; M Brown, R Minson, A O’Connell and I Ramsay, ‘Employee Participation in Employee Share Ownership Plans: The Law, Company Objectives and Employee Motives’, op. cit., p. 4.

[20].      M Brown, R Minson, A O’Connell and I Ramsay, ‘Employee Participation in Employee Share Ownership Plans: The Law, Company Objectives and Employee Motives’, op. cit., pp. 11–12.

[21].      M Brown, R Minson, A O’Connell and I Ramsay, ‘Employee Participation in Employee Share Ownership Plans: The Law, Company Objectives and Employee Motives’, op. cit., pp. 12.

[22].      M Brown, R Minson, A O’Connell and I Ramsay, ‘Employee Participation in Employee Share Ownership Plans: The Law, Company Objectives and Employee Motives’, op. cit., pp. 11–12; I Landau, R Mitchell, A O’Connell , I Ramsay and S Marshall, ‘Broad based employee share ownership in Australian listed companies: An empirical analysis’, op. cit., p. 419–421.

[23].      As discussed below, for shares to qualify for one of the two taxation concessions available a number of criteria, including that the company offering the ESS is the employee’s employer (or employer’s holding company) and that a single employee does not hold more than a five per cent interest (or five per cent of voting rights) in the company offering the ESS.

[24].      See Division 13A of Part III of the Income Tax Assessment Act 1936, as existed immediately prior to the 2009 amendments, accessed 4 May 2015.

[25].      A O’Connell, ‘Employee share ownership plans in Australia: the taxation law framework’, Journal of the Australasian Tax Teachers Association, 3(1), 2008, p. 43, accessed 23 April 2015.

[26].      R Deutsch, M Friezer, I Fullerton, P Hanley & T Snape, The Australian Tax Legislation 2015, Thomason Reuters, Sydney, 2015, para [4.180]; A O’Connell, ‘Employee share ownership plans in Australia: the taxation law framework’, op. cit., p. 43.

[27].      Importantly, the taxpayer was not able to claim both the exemption concession and the deferral concession, they had to make an election: Income Tax Assessment Act 1936 taking into account amendments up to Act No. 145 of 2008 (as at 18 December 2008) sections 139BA and 139E.

[28].      The concessions were not available if the recipient was not in an employment relationship (e.g. an independent contractor) or if shares or rights were acquired by an associate of an employee or the shares were in an unrelated company.

[29].      See: Income Tax Assessment Act 1936 taking into account amendments up to Act No. 145 of 2008 (as at 18 December 2008) Division 13A, subdivision 13DB generally.

[30].      See section 139GB of the: Income Tax Assessment Act 1936 taking into account amendments up to Act No. 145 of 2008 (as at 18 December 2008) defined `permanent employees' as employees employed on a full time or part time basis with at least 36 months prior service (although the service did not have to be continuous).

[31].      Income Tax Assessment Act 1936 taking into account amendments up to Act No. 145 of 2008 (as at 18 December 2008), section 139CE.

[32].      Income Tax Assessment Act 1936 taking into account amendments up to Act No. 145 of 2008 (as at 18 December 2008), subsection 139BA(2); A O’Connell, ‘Employee share ownership plans in Australia: the taxation law framework’, op. cit., p. 47.

[33].      Income Tax Assessment Act 1936 taking into account amendments up to Act No. 145 of 2008 (as at 18 December 2008), section 139CA.

[34].      I Landau, A O’Connell and I Ramsay, ‘Employee share schemes: regulation and policy’, op. cit., p. 464.

[35].      Income Tax Assessment Act 1936 taking into account amendments up to Act No. 145 of 2008 (as at 18 December 2008), section 139CA; A O’Connell, ‘Employee share ownership plans in Australia: the taxation law framework’, op. cit., p. 47.

[36].      Income Tax Assessment Act 1997, Division 115 generally, accessed 4 May 2015.

[37].      O’Connell, ‘Employee share ownership plans in Australia: the taxation law framework’, op. cit., p. 47.

[38].      I Landau, A O’Connell and I Ramsay, ‘Employee share schemes: regulation and policy’, op. cit., p. 464.

[39].      Ibid.

[40].      Tax Laws Amendment (2009 Budget Measures No. 2) Act 2009, accessed 4 May 2015.

[41].      For a brief analysis of the controversy surrounding the original reforms proposed in 2009 and the Government’s response to stakeholder concerns see: I Landau, A O’Connell and I Ramsay, ‘Employee share schemes: regulation and policy’, op. cit., pp. 460, 464–466.

[42].      Ibid., p. 465.

[43].      Income Tax Assessment Act 1997, section 83A-35.

[44].      These included that at least 75 per cent of permanent Australian employees of at least three years’ service are eligible to participate in the ESS, the shares (or rights to shares) able to be acquired under the ESS are ordinary shares and that no single employee owns (or has voting power to control) more than five per cent of the company offering the ESS: Income Tax Assessment Act 1997, section 83A-105.

[45].      Income Tax Assessment Act 1997, sections 83A-115 and 83A-120.

[46].      Explanatory Memorandum, Tax and Superannuation Laws Amendment (Employee Share Schemes) Bill 2015, op. cit., p. 7. See also: Australian Taxation Office (ATO), ‘Employee share schemes - guide for employees’, ATO website, accessed 2 January 2015.

[47].      Australian Taxation Office, Taxation Statistics 2012-13, Individual tax: selected items for income years 1978-79 to 2012-13, accessed 6 May 2015.

[48].      If an average tax rate of 30% is applied then the tax payer would have to find about $300 from other sources to pay the required tax on these ESS interests.

[49].      Employee Ownership Australia and New Zealand, The Changing ESS Landscape since 1 July 2009, April 2013, pp. 5–7, accessed 4 May 2015.

[50].      C Newell, T Stumn and W Keating (Carter Newell Laywers), Employee share schemes: a phoenix rising from the ashes, Lexology article, 2 April 2015, accessed 23 April 2015.

[51].      S Bernhardt and S Cartoon (Partner and Senior Associate respectively, Allens Linklaters), Focus: sensible changes proposed to the Australian taxation of ESS interests, Allens Linklaters, 27 March 2015, accessed 23 April 2015.

[52].      B Billson, ‘Second reading speech: Tax and Superannuation Laws Amendment (Employee Share Schemes) Bill 2015’ House of Representatives, Debates, 25 March 2015, pp. 3358, accessed 23 April 2015.

[53].      Australian Government, Department of Prime Minister and Cabinet, Industry Innovation and Competitiveness Agenda, 14 October 2014, pp. vii, x, xx, 76–80 accessed 24 April 2015.

[54].      Department of Broadband, Communications and the Digital Economy, Advancing Australia as a Digital Economy: An update to the national digital economy strategy, June 2013, pp. 31–32, accessed 27 March 2015.

[55].      Treasury, Employee Share Schemes and Start-Up Companies: Administrative and Taxation Arrangements, webpage, 2 August 2013, accessed 27 March 2015.

[56].      Treasury, Employee Share Schemes and Start-ups, Invitation to Comment, webpage, 21 January 2014, accessed 27 March 2015.

[57].      Ibid.

[58].      Treasury, Improvements to the Taxation of Employee Share Schemes, Draft Legislation, 14 January 2015, accessed 27 March 2015.

[59].      Explanatory Memorandum, Tax and Superannuation Laws Amendment (Employee Share Schemes) Bill 2015, pp. 45–48, accessed 27 March 2015.

[60].      Senate Selection of Bills Committee, Report No. 4 of 2015, 26 March 2015, accessed 27 March 2015.

[61].      J Clare (Shadow Minister for Communications), Transcript of interview with Kieran Gilbert: Sky News AM Agenda: 15 October 2014: Employee share schemes; Crowd funding; STEM skills; Man Booker Prize, 15 October 2014, accessed 24 April 2015.

[62].      A Heber, Here's What Australia's Startups Think Of The Draft Employee Share Scheme Legislation, Business Insider, 16 January 2015, accessed 24 April 2015.

[63].      StartupAUS, Employee Share Schemes Changes a First Step in the Right Direction, media release, 14 October 2014; P Smith, ‘Start-ups back share scheme law’, Australian Financial Review, 26 March 2015, p. 9, accessed 24 April 2015.

[64].      Employee Ownership of Australia and New Zealand, Employee Equity in Start-up Companies, media release, 5 January 2015, accessed 9 April 2015.

[65].      I Willox (Chief Executive Australian Industry Group), Federal Government's Industry Innovation and Competitiveness Agenda, media release, 14 October 2014, accessed 9 April 2015.

[66].      Australian Chamber of Industry and Commerce, Fixing Employee Share Schemes A Win for Entrepreneurs, media release, 14 January 2015, accessed 9 April 2015.

[67].      For example, the Tax Institute, Improvements to the Taxation of Employee Share Schemes (submission to Treasury), 9 February 2015.

[68].      S Bernhardt and S Cartoon (Partner and Senior Associate respectively, Allens Linklaters), Focus: sensible changes proposed to the Australian taxation of ESS interests, op. cit.; J Newnham and B Feltham (Partners, DLA Piper), Changes to the employee share scheme tax regime, JDSupra article, 28 January, p. 1, accessed 24 April 2015: ‘Although the proposed amendments are a welcome development, in practice the main sector that will benefit and potentially change their current ESS practices are companies that qualify for the start-up concessions.’; J Newnham and B Feltham (Partners, DLA Piper), Draft legislation released covering changes to the employee share scheme tax regime, DLA Piper, 25 March 2015, accessed 24 April 2015: where it was noted that if passed the Bill would ‘make Australia’s taxation of those interests more competitive by international standards, and to assist Australian companies to attract and retain high quality employees in the international labour market.’; B Travers and A Saoud (Partners, Tax, KPMG), Improvements to taxation of Employee Share Schemes, KPMG, 16 January 2015, p. 2, accessed 24 April 2015: ‘The changes... will make options an attractive form of rewarding employees... the new rules will ensure the Australian tax treatment is more closely aligned with international practice, assisting the operation of multinational companies operating in Australia’.

[69].      J Newnham and B Feltham (Partners, DLA Piper), Changes to the employee share scheme tax regime, op. cit.; J Tretheway (Partner, Johnson Winter and Slattery), New employee share scheme rules, Lexology article, 18 March 2015, accessed 27 April 2015.

[70].      Explanatory Memorandum, Tax and Superannuation Laws Amendment (Employee Share Schemes) Bill 2015, p. 3.

[71].      The Statement of Compatibility with Human Rights can be found at page 51 of the Explanatory Memorandum to the Bill.

[72].      Income Tax Assessment Act 1997, accessed 4 May 2015.

[73].                 The G20 Agenda for Growth: Opportunities for SMEs Conference, 20 June 2014, Parliament House Melbourne, Report of Proceedings and Recommendations, p. 35, accessed 14 April 2015.

[74].      Paragraph 83A-105(1)(b) as amended by item 15, referring to proposed subsection 83A-45(1).

[75].      Proposed subsection 83A-105(6), at item 18.

[76].      Income Tax Assessment Act 1997, subsection 83A-105(2).

[77].      Proposed section 83A-45(3).

[78].      Paragraph 83A-105(1)(b) as amended by item 15, referring to proposed subsections 83A-45(2) and (6).

[79].      Income Tax Assessment Act 1997, subsection 83A-105(4).

[80].      Paragraph 83A-35(1) as amended by item 8, referring to proposed subsection 83A-45(5).

[81].      Paragraph 83A-35(1) as amended by item 8, referring to proposed subsections 83A-45(4) and (5).

[82].      Paragraph 83A-35(1) as amended by item 8, referring to proposed subsections 83A-45(2) and (6).

[83].      Explanatory Memorandum, Tax and Superannuation Laws Amendment (Employee Share Schemes) Bill 2015, pp. 18–19.

[84].      Ibid., p 25.

[85].      Ibid.

[86].      Ibid., p. 19.

[87].      Proposed subsections 83A-33(2) to (4) and (6).

[88].      Proposed subsection 83A-33(5).

[89].      Proposed section 83A-45(3).

[90].      Paragraph 83A-105(1)(b) as amended by item 15, referring to proposed subsections 83A-45(2) and (6).

[91].      Proposed paragraph 83A-33(1)(b), which refers to proposed section 83A-45 in its entirety. In turn, proposed subsections 83A-45(4) and (5) deal with the minimum holding period.

[92].      Proposed paragraph 83A-5(c).

[93].      Proposed paragraph 83A-33(7)(b).

[94].      Employee Ownership of Australia and New Zealand, Employee Equity in Start-up Companies, media release, 5 January 2015, op. cit.

[95].      Australian Institute of Company Directors, Exposure Draft Tax and Superannuation Laws Amendment (2015 Measures No 1) Bill 2015 (submission to Treasury), 6 February 2015, p. 2, The Tax Institute, op. cit.

[96].      Proposed subsection 960-412(2). See also: Explanatory Memorandum, Tax and Superannuation Laws Amendment (Employee Share Schemes) Bill 2015, p. 24.

[97].      Explanatory Memorandum, Tax and Superannuation Laws Amendment (Employee Share Schemes) Bill 2015, p. 6.

 

 

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