Budget 2021 – Proposed changes to employee share scheme rules to improve flexibility and appeal

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By Andrew Spalding, Partner and Iain Laughland, Partner

[2 minute read]

In his Budget speech this week the Treasurer announced the Federal Government’s plans to make minor changes to the tax and disclosure rules with respect to employee share schemes to increase their flexibility for employees, partly to assist the Government’s general policy measures of increasing the mobility of the workforce in a world where migration has stagnated.

What are the proposed changes?

Tax change

  • The Government proposes to remove the taxing point for employee share schemes at termination of employment.
  • This means that the taxing point could extend beyond the termination of employment to the earliest of:
    • for shares – when they are no longer the subject of a real risk of forfeiture or genuine sale restrictions
    • for rights/options – after exercise where the shares are no longer subject to a real risk of forfeiture and/or genuine sale restrictions,

subject to a maximum deferral of 15 years from the date of grant.

Regulatory changes

  • The Government proposes to remove the disclosure requirements, and provide an exemption from licensing, anti-hawking and advertising prohibitions for employee share schemes for all types of company where employers do not charge or lend to the employees to whom they offer the employee share scheme.
  • The Government proposes to increase the value of shares that can be issued to an employee with simplified disclosure requirements in an unlisted body, and exemptions from licensing, anti-hawking and advertising requirements, from $5,000 to $30,000 per employee per year (leaving unchanged the absence of such a value cap for listed companies), where employers do charge or lend for issuing shares in an unlisted company.

Commentary

The tax change brings Australia’s taxation system of employee share plans more into line with its global trading partners. The taxing event at a cessation of employment has often led to a circumstance where a change of job triggers a tax liability on an asset that the employee is unable to liquidate at that time to cover such taxes. The aim is that the tax change will better align the tax event with the crystallisation of the benefit that arises from the participation in the plan, and remove the punitive impact of the current rules if an employee happens to move employment after the vesting of the incentive.

The tax change may impact the design of employee share and option plans targeted at the tax deferral concession, particularly those of listed companies where it is common for plans to be structured to ameliorate the impact of a cessation of employment taxing point (for example, by designing the plan to ensure rights or options issued under the plan qualify as ‘indeterminate rights’). Companies may wish to revisit and redesign their existing plans, once the tax change takes effect. Tax summaries for existing plans will also need to be amended (where grants will be made after the tax change takes effect) to reflect the tax change.

Plans designed to take advantage of the employee share scheme ‘start-up concession’ are unaffected by this tax change.

While still lacking detail at this stage, it is expected that the changes to the regulatory environment will require the revocation of the existing ASIC Class Order [CO 14/1000] (listed bodies) and ASIC Class Order [CO 14/1001] (unlisted bodies) on implementation of the changes. In particular, it has long been an issue for unlisted bodies to comply with the additional ‘red tape’ requirements contained in ASIC Class Order [CO 14/1001] with respect to the ability to issue equity incentives. The announcement of the regulatory changes should simplify that process greatly for those types of companies. Whether the changes remove the requirement to issue an ‘offer document’ to employees in its entirety will remain to be seen but any changes that remove some of the regulatory burden of the current class order relief are positive, and will be welcomed extensively by all types of company.

The timing and the precise detail of the changes is not yet clear but it is hoped that the Federal Government and the relevant regulators move quickly to implement the changes.

Once implemented, the tax changes will apply to employee share scheme interests issued from the first income year following Royal Assent to the legislation.

For further information, please do not hesitate to contact us.

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