The Government announced significant changes to the taxation treatment of employee share schemes effective from 7.30pm on Tuesday 12 May 2009.

Proposed changes

Under the arrangements announced in the 2009 Federal Budget , all discounts on shares and options provided under an employee share scheme, either qualifying or non-qualifying, will be assessed in the income year in which the shares or options are acquired.

Employees acquiring shares or options under qualifying employee share schemes will no longer be able to elect to defer the taxation of their discount to a later time  and must include the value of the discount in their income tax return in the year of grant of the option or share.

The Government will also limit access to the $1,000 upfront concession. The $1,000 upfront tax exemption will be limited to those employees with less than $60,000 of adjusted taxable income (i.e. taxable income plus reportable fringe benefits, salary sacrifice arrangements and net investment losses).

The proposed changes will not affect shares or options already held by employees.

Current arrangements

Under the current arrangements, employees who take part in employee share schemes are required to pay tax on the difference between the amount they paid for the share or option and the value of a share or option they receive from their employer. This is currently the case in relation to both qualifying shares schemes and non-qualifying share schemes.

An employee in a qualifying share scheme can elect to have the discount assessed either:

1. In the income year the shares or options are acquired. If so, the employee can access an upfront tax exemption of up to $1,000 on discounts received each year.
2. In the year in which the share ownership becomes unrestricted. An employee in a non-qualifying scheme will be taxed on the discount when he or she acquires the shares or options. This means they do not enjoy the tax benefits associated with qualifying employee share schemes. There is no $1,000 discount applicable to non qualifying share schemes.

Actions

1. Employers will need to reconsider the structure of all existing share and option plans and consider alternative remuneration plans. .
2. Employees will need to consider the effectiveness of an investment in an employee share scheme.
3. Moore Stephens will be lobbying the Federal Government to overturn the proposed changes as the revenue gain to the Commonwealth is not significant ($10 million in 2009/10, $90 million in 2010/11, $60 million in 2011/12 and $40 million in 2012/13).

Questions

Please contact Michael van Schaik, Associate Director, Employment & Remuneration Services.  
Phone: +61 (0) 3 8635 1835
Email: mvanschaik@moorestephens.com.au