Stemming from the May 2009 Budget and subsequent industry consultation, the Government recently released an exposure draft of the revised Legislation. Despite a Senate Review Committee report in which the Liberal Party expressed opposition to the policy intent of the Government, it currently appears likely that the legislation will be passed substantially in the form released, meaning that companies can commence considering how to apply it to their individual situations.
The Proposed Amendments
Broadly, the proposed amendments:
- Limit the extent of schemes taxable under the Employee Share Scheme rules to shares in the company or holding company of which a taxpayer is an employee;
- Tax any discount provided on the grants of shares or rights to acquire shares in the year the interest was granted as a default position;
- Allow the taxing point to be deferred to a later time where the scheme is either a qualifying Salary Sacrifice Scheme, or a scheme where there is a real risk of the interest being forfeited (eg due to performance hurdles);
- Allowing a $1,000 reduction in assessable income for schemes taxable at grant, subject to a $180,000 income test and a number of other conditions.
- Placing reporting obligations on the employer to report to the employee and ATO details of the grant and assessment of when the employee will be taxable.
Forecast Impact
Having considered the ramifications of these amendments, we would foresee the following broad scheme styles being relevant going forward:
- Where genuine performance hurdles are essential to your needs:
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- Deferred tax schemes: these will be useful where either a company requires a limited cash outlay on their incentives or a transparent alignment of shareholders and management interest (eg for listed entities);
- Phantom equity or deferred bonus schemes: where the cash impact of bonus style schemes is less relevant and the company is seeking a scheme with less administrative obligations (eg closely held entities);
- Upfront tax schemes: where there is either:
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- Value in delivery of a company wide scheme using the $1,000 concession;
- No concern for the upfront taxation impact; or
- Intention to provide finance support for the upfront tax issue;
- Continuation of existing loan schemes: where the objective is not to deliver a discount to employees at the time of grant, but provide access to future growth within the concessional CGT tax environment.
As always, due consideration needs to be given not only to the shareholder and governance issues associated with any scheme, but also the wider taxation and financial reporting implications.
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