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 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]
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]
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.
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
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
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
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]
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.
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]
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]
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.
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]
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).
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
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[51]. S
Bernhardt and S Cartoon (Partner and Senior Associate respectively, Allens
Linklaters), Focus:
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[52]. B
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reading speech: Tax and Superannuation Laws Amendment (Employee Share Schemes)
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[53]. Australian
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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
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[55]. Treasury,
Employee
Share Schemes and Start-Up Companies: Administrative and Taxation Arrangements,
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[56]. Treasury,
Employee Share Schemes and Start-ups, Invitation
to Comment, webpage, 21 January 2014, accessed 27 March 2015.
[57]. Ibid.
[58]. Treasury,
Improvements
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2015, accessed 27 March 2015.
[59]. Explanatory
Memorandum, Tax
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45–48, accessed 27 March 2015.
[60]. Senate
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[61]. J
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share schemes; Crowd funding; STEM skills; Man Booker Prize, 15 October
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[62]. A
Heber, Here's
What Australia's Startups Think Of The Draft Employee Share Scheme Legislation,
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[63]. StartupAUS,
Employee
Share Schemes Changes a First Step in the Right Direction, media
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back share scheme law’, Australian Financial Review, 26 March 2015,
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[64]. Employee
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[65]. I
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[66]. Australian
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[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
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[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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