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Employee share ownership plans – Urgent Update

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In an earlier edition of the MST Weekly News we reported on proposed changes to the tax treatment of employee share ownership plans (ESOPs).

By way of summary, on budget night (12 May 2009) the Treasurer announced the Government’s intention to drastically amend the rules governing the taxation of ESOPs.

On 1 July 2009 Senator Nick Sherry released a Policy Statement setting out the proposed framework for the taxation of ESOPs. The Policy Statement indicated that the Government will adopt the following position:

  1. In general, discounts on the value of shares and rights provided under an ESOP will be assessed in the income year in which those shares and rights are acquired.
  2. It will be possible to defer, for up to 7 years, the assessment of discounts on the value of shares and rights provided under an ESOP to an employee if:
    • A ‘real risk of forfeiture’ exists in relation to the ESOP rights
    • The ESOP is a capped salary sacrifice based scheme offering no more than $5,000 worth of shares to an employee
  3. The test of whether there is a ‘real risk of forfeiture’ is whether a reasonable person would conclude that there is a real risk that the share or right will not come home to an employee by a particular time and be forfeited. This test will be satisfied where a share or right is subject to meaningful performance hurdles. An example provided in the government’s policy statement is where the shares or rights are conditional upon the employee remaining with the employer for three years
  4. Employees may seek a tax refund in circumstances where forfeited shares have been taxed, unless the forfeiture relates to an intentional choice by the employee.
  5. There will be an upfront tax exemption of $1,000 available to employees with adjusted taxable incomes of less than $180,000.
  6. New reporting obligations will be imposed on employers offering ESOPs. Employers will be required to provide the Australian Taxation Office with details of the market value of the shares and the rights acquired under an ESOP at the employee’s taxing point.

This policy statement represents a significant softening of the position that was announced on budget night and in our view a suitably drafted ESOP will continue to be an effective vehicle to provide incentive based remuneration for your employees.

The amendments proposed in the Policy Statement are currently being reviewed by the Senate Economics References Comittee. The Senate Economics References Comittee is due to report its findings to the Senate on 17 August 2009.

The Government’s current intention is for the position set out in the Policy Statement to be passed in the spring sitting of Parliament but will apply to benefits granted under ESOPs from 1 July 2009. However, the Government’s position and the timing of the legislation may be affected by the Senate Economics References Comittee report.

Author: Sam Kings