Employee share ownership plan saga continues
In earlier news we reported on the Government’s proposed plan to drastically amend the rules governing the tax treatment of employee share ownership plans (ESOPs).
The latest development in this ongoing saga is that on Friday, Treasury released an exposure draft of the legislation and explanatory documents for the proposed new rules. The draft legislation is broadly consistent with the Policy Statement released on 1 July 2009.
The main points to note from the draft legislation are:
- The draft legislation sets down the ‘real risk’ of forfeiture test. Consistent with the Policy Statement, if an employee’s ESOP rights are subject to a ‘real risk’ of forfeiture, tax will only be payable on those ESOP rights when they are exercised. There is, however, little guidance in the draft legislation itself about when the real risk of forfeiture test will be satisfied.
- Unlisted companies are not required to obtain an auditor’s valuation of shares and rights.
The draft explanatory memorandum provides the following specific examples of how the real risk of forfeiture test applies:
The real risk of forfeiture test will not be satisfied if the ESOP rights:
- are conditional on the company’s value falling by 95%;
- will crystallise in all circumstances except for where the employee is dismissed for fraud or gross misconduct; or
- are conditional on the employee choosing to exercise those rights.
The real risk of forfeiture test will be satisfied if the ESOP rights:
- are conditional on the employee remaining with the company for three years; or
- are conditional on the company’s market share increasing over a specified period.
Although Treasury has confirmed that the proposed amendments will apply from 1 July 2009, Treasury is still developing transitional provisions.
Submissions on the legislation may be made by 31 August 2009.
Our Corporate Advisory team will continue to publish updates as the ESOP tax saga continues to unfold.
Authors: Savvas Apostolou and Laughlin Nicholls