Employee share schemes (which are taxed under Div 13A of the ITAA36) often provide employees with an opportunity to purchase shares or options in their employer company at a discount to the market value. But, the law requires the employee to pay income tax on the discount (being the difference between the price paid for the shares or options and their market value). Employees who are issued with shares or options under an ESS on terms which enable the shares or options to be characterised as 'qualifying' shares or rights, were able to choose between:
If the employee doesn't specifically choose to be taxed up front, then the tax liability on any discount is automatically deferred until the employee's 'cessation time'.
Generally, deferral is seen as an attractive option when it comes to tax. However, this is not always the case when it comes to these employee share schemes and Div.13A because the amount of the assessable discount at the deferred time may be different to the amount of the assessable discount at the issue date.
When the tax is:
Therefore, if the value of shares or options increases after their issue date, then the assessable discount will generally be larger at the cessation time than at the issue time. Because of the operation of the CGT rules (and in particular the application of the 50% CGT discount), this can increase the overall tax for an employee who chooses to be taxed under Div. 13A on a deferred basis.
Under the current rules, an employee can choose to be taxed upfront by declaring their choice in their income tax return. The rules do not require this income tax return to be lodged on time or in the year the employee is issued with the shares or options under the scheme.
The Federal Government was concerned that the rules in Div.13A were being exploited:
The new rules prevent both of these practices.
The new rules (which are yet to be legislated) will require employees who have received qualifying shares or options under a scheme and who want to be taxed upfront under Div.13A to lodge their choice in the year in which the shares or options are issued.
If an employee does not choose in the year the shares or options are issued, then they will automatically be taxed on a deferred basis (at their relevant cessation time).
Effectively, from 1 July 2008, the changes close what the Federal Government considered was a flaw in the operation of the Div.13A ESS rules.
For questions and more information about employee share schemes, call Maddocks in Melbourne on 03 9288 0555 or Sydney 02 8223 4100 and ask for a member of the Maddocks Revenue Team.
Paul is a Senior Associate in the Maddocks Commercial team with particular expertise in commercial agreements for the supply of goods and/or services, the Personal Property Securities Act 2009, the National Consumer Credit Protection Act 2009 and the National Credit Code and the Australian Consumer Law.
Paul's key areas of practice include:
Before joining Maddocks, Paul was employed for 13 years with the Victorian Department of Justice, principally as a Deputy Registrar in the Victorian Magistrate's Court, but also as a legislation, policy and project officer for the Department.
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For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of their team.