On 14 October 2014, the Federal Government released its Industry Innovation and Competitiveness Agenda, which contained its long awaited Employee Share Scheme reforms.
The current Employee Share Scheme rules have proven very problematic for SME’s for a number of reasons, not the least being the size and timing of the taxation impact of any Scheme on the staff, most often at a time when there is no ability to actually sell any equity to help fund the associated taxation liability.
The Federal Government’s announcement is thin on detail at this early stage, with the supporting legislation still to be drafted through an industry consultation program, but what is clear is that the changes are scheduled to apply from 1 July 2015, and that the overall implication for SME’s will depend on whether the SME constitutes a “Start-up” or not.
Start-up Companies
The clear winners are private “start-up” companies which are defined as unlisted companies, incorporated for less than ten years and with an aggregate turnover of less than $50 million.
Companies that fit into this category are able to provide Option and Share schemes with no up-front taxation in the hands of the Employee, and tax levied on sale under the Capital Gains Tax regime. This is a significant departure from the current rules in allowing employees to access the growth in value of the shares on Capital Gains Tax account (and the potential CGT discount), rather than ordinary income tax, as well as ensuring the tax payable is timed with an actual sale, rather than vesting.
A number of conditions need to be met for the Scheme to qualify for this concession, including Share schemes being offered for no more than a 15% discount, Share Option schemes not being issued “in the money” and there being a minimum holding period of at least 3 years.
Non Start-up Companies
For all other Companies, unfortunately the reforms are not as substantial.
For Share Schemes, there appears to be no substantive change to how they will operate – with tax to be levied either on grant of the Shares or at a deferred time having regard primarily to whether there is a risk of forfeiture.
For Option Schemes, the Government has announced a roll back of the taxation rules to the pre 2009 position. This means that Schemes will continue to be categorised into “taxed up front” or “deferred tax” schemes with tax payable at the Employees ordinary income tax rate at the relevant point, as they are currently. The key difference however will be in respect to “deferred tax” schemes whereby tax will primarily be levied when the Option is exercised, rather than when the Options vests (or the risk of forfeiture lifts). This will afford greater control over the timing of the taxation in the hands of the Employee.
Moore Stephens response
The Start-up concession is a welcome announcement that provides some very compelling benefits, and any Company that is in the 7 to 9 years of age, which falls under the $50m turnover limit, should give serious regard to whether an Employee Share Scheme fits their strategic plan before the start-up window closes.
For all other Companies, we are disappointed that very little has been done to address some of the practical hurdles of the current rules. For SME’s considering an Employee Share Scheme, we envisage the planning process to remain much the same as it has over the past few years.
If you would like to discuss this article or any other matter, please do not hesitate to contact the authors or visit moorestephens.com.au
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Michael Dundas
Director
Moore Stephens Sydney
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T +61 2 8236 7788
F +61 2 8215 7902
E mdundas@moorestephens.com.au
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Andy Briggs
Director
Moore Stephens Melbourne
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T +61 3 8635 1969
F +61 3 8102 3400
E abriggs@moorestephens.com.au
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