Tax planning plays a crucial role in addressing the concerns of our business clients who wish to reward their staff with equity in the business. Our business clients are often interested in rewarding their staff with equity. They see it as an opportunity for employees to have skin in the game, with the obvious motivational and staff retention benefits.
Unfortunately, the issue of shares or options to employees means the employee often pays tax on the shares’ value when issued. This can result in a tax liability for the employee when they haven’t yet received any cash that can be used to pay the tax. This problem and other complexities have meant that Employee Share Schemes (ESSs) have not been popular with small businesses.
With new rules taking effect from 1 July 2015, ESSs look set to become more attractive.
The new rules are beneficial for start-up companies. These are unlisted Australian companies under 10 years old with aggregated group turnover not exceeding $50 million. Employees of these companies can benefit from the following:
- Shares (but not options) can be issued at a discount of up to 15%, with the discount not attracting tax.
- The CGT cost base of the shares is taken to be the market value of the shares at the issue date. This will mean that the discount will never be subject to tax.
- If the discount is more than 15%, tax on the discount is deferred until the shares are sold.
Some minor changes to the ESS rules apply to other companies as well. Employees can benefit from deferred taxation if the ESS is subject to a “real risk of forfeiture”, or if the ESS is acquired under a salary sacrifice arrangement and the employee receives no more than $5,000 worth of shares in an income year. Under the new rules, a discount on options is deferred until later, even where the options don’t contain a real risk of forfeiture.
Despite the new rulings, ESS tax rules for ESSs remain complex, and the above is just a general overview of the changes. Care needs to be taken in implementing an ESS as it can create corporate governance and ASIC issues.
If you are interested in exploring how an ESS may complement your business strategy, please get in touch with us.
*Correct as of July 2015
Disclaimer – Kreston Stanley Williamson has produced this article to serve its clients and associates. The information contained in the article is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas in this article, you must seek advice about your circumstances. Liability is limited by a scheme approved under professional standards legislation.
