In conjunction with the Federal Government’s Industry Innovation and Competitiveness Agenda released in October 2014 was an announcement of a reform program for Employee Share Schemes (ESS).  No legislation has yet been released and there is a consultation process underway to ensure that key aspects, which were not in the original announcement, are appropriately covered when the legislation is released.

 

In terms of measures announced, there are changes to the taxation of options that will impact a broader range of employers. From 1 July 2015, the taxing point of options will be the time of exercise. This is a positive change to the current rules and should make options a more attractive form of rewarding employees - the taxing point will once again align with the time the employee is able to realise a gain on the options. 

Perhaps the most publicised part of the announcement is the proposal to provide assistance to start-up companies.  The current proposals provide that, to qualify as a start-up, companies must: 

     i.          not be a listed company;

       ii.          have an aggregate turnover less than $50m; and

      iii.          have been incorporated for 10 years or less. 

Any shares and options granted under an ESS will only qualify for concessional treatment provided: 

·       Options: the exercise price is not less than market value of the shares at the date of grant;

·       Shares: the discount granted must not be more than 15% at date of purchase.

Once a company satisfies the conditions to qualify as a start-up, any qualifying shares and options granted under an ESS will receive the following advantages:

·       The first taxing point for both shares and options will be deferred until the shares are  sold, with a 15 year time limit suggested in the Government’s media release; and

·       The entire gain made on the sale of shares will be taxed as a capital gain. Provided the asset (either the shares or options) disposed of has been held for more than 12 months, the gain should qualify for the 50% CGT discount. 

ASIC has recently announced changes to its employee incentive scheme class order relief, that, once effective, will reduce the administrative burden of implementing some employee share schemes. However, it is not yet clear how ASIC may address the need to simplify the regulatory requirements for start-ups as contemplated in the latest proposals. The timing of ASIC’s changes provides an opportunity for the Government to establish a tax, reporting and regulatory framework that will encourage wider implementation of ESS plans. 

The announcements present an opportunity for corporates to re-examine remuneration structures and how they look to incentivise their employees. There is clearly food for thought as it is clear that some companies will have the capacity to provide significant value to their employees.

Author: David Pring, Partner, KPMG’s Private Enterprise.