By Michele Muscillo, Partner and Damian O'Connor, Special Counsel
When addressing their end of financial year obligations, employers need to aware of new changes to the taxation of employee share scheme (EES) interests, effective from 1 July 2009. These rules apply to shares, stapled securities and rights to acquire them (including options), which have been provided at a discount under an ESS. A significant change under the new legislation is that employers must issue statements to scheme participants, in much the same way as PAYG payment summaries are issued. These statements must be issued by 14 July 2010.
Application of the ESS reporting requirements
This new legislation generally applies to ESS interests provided from 1 July 2009. However, the new reporting requirements can also apply to arrangements in place before that time. The new rules cover not only employees, but also individuals in relationships similar to employment, such as directors and independent contractors. The rules also apply to ESS interests acquired by associates of employees, such as family trusts.
ESS reporting requirements
Reporting to employees Employers are generally required to give an ESS statement to their employees by 14 July 2010 if:
- the ESS interest has been acquired and taxed upfront during the financial year; or
- a deferred taxing point on an ESS interest has arisen during the financial year (see below).
The 'deferred taxing point' will generally be whicheveris the earliest of the situations below:
- When the employee ceased the employment underwhich they acquired the right or share;
- Seven years after the employee acquired the share or right; or
- When there is no longer any real risk of forfeiture and the scheme no longer genuinely restricts the exercise or disposal of the right or share.
In determining the deferred taxing point, employers should note the '30 day rule' applies where the employee disposes of their ESS interest within 30 days of the deferred taxing point. In this case, the deferred taxing point shifts to become the date of disposal. Equity interests or rights granted before the commencement of the new legislation may also be caught by the new reporting requirements. The ATO has indicated it may allow reduced reporting requirements in some circumstances for the 2010 financial year, so that a 'reduced ESS statement' is given to the employee, and the employer does not need to include the information in any annual report. Eligibility for this reduced reporting will need to be carefully worked through.
The statement to employees must include:
- the discounts on the ESS interests where a taxing point arose during the financial year; and
- the total tax file number (TFN) amounts withheld from discounts during the financial year.
Reporting to the ATO
Employers must provide an ESS annual report on the approved ATO form by 14 August 2010, which must include:
- the 'plan identifier' - a unique reference to the specific plan under which the ESS was offered;
- the 'plan date' - the date a taxing point happens to an ESS interest (for tax up-front this will be the acquisition date, or for tax-deferred, this will be the deferred taxing point);
- TFN amounts withheld from discounts on ESS interests for which a taxing point arose during the financial year;
- the number of ESS interests acquired which were and were not eligible for the $1,000 reduction;
- the number of ESS interests for which a deferred taxing point arose during the financial year; and
- the discounts for ESS interests classified as within the financial year for the purposes of the new legislation.
The taxation rules dealing with employee equity arrangements are particularly complex, and the ATO's delay in setting out the detail of its reporting requirements will create considerable pressure on employers dealing with other year-end reporting issues.
The ATO's increasing focus on equity arrangements means that considerable care should be taken to comply with its deadlines, and to ensure that information is appropriately reported.
If you have any queries about the new tax rules, or would like our help dealing with the new reporting requirements, please contact HopgoodGanim's Corporate Advisory and Governance or Taxation and Revenue specialists.
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