[Insert DD Month YYYY]
[Insert Client Name]
[Insert Client Position]
[Insert Company Name]
[Insert Client Address]
[Suburb State Post Code]
Dear [Insert Client Name]
Employee share (or option) scheme taxation (“ESS”)
Re:
Some significant changes have been made to the ESS rules effective from 1 July 2015.
Executive summary
1. If your company qualifies as a start up, new simplified rules will apply from 1 July 2015
2. For all other companies, the pre-existing rules apply subject to certain changes.
1. Start Up Rules
If these rules apply, an employee can benefit from the following:
i)
ii)
iii)
shares (but not options) can be issued at a discount of up to 15% and the discount is not
subject to tax
the cost base of the share for CGT purposes is taken as its market value on the issue date
(meaning the discount is never taxable)
if the shares are issued at a greater than 15% discount, the taxing point is deferred until
sale of the shares (and the discount is then taxed as part of the taxable gain on sale, not
as income).
In order to qualify the company must meet the definition of start up:
i)
the employer and any members of its corporate group must not be listed on an approved
stock or securities exchange at the end of its most recent year of income
ii) the employer and any members of its corporate group must be less than 10 years old
iii) it must have an aggregated turnover not exceeding $50 million
iv) it must be an Australia resident taxpayer.
For all other companies, the general rules described below will apply.
2. General Rules
Since 1 July 2009 employees have not been able to choose whether to be taxed upfront or at a later
time. Now the terms of the ESS structure will determine whether the employee is taxed upfront or on a
deferred basis.
All employee share schemes (excluding the start up rules described below) default to being taxed
upfront and the employee will only benefit from deferred taxation if:


the ESS is subject to a “real risk of forfeiture” or
the ESS is acquired under a salary sacrifice arrangement and the employee receives no more
than $5,000 worth of shares under those arrangements in an income year.
Note: under the new rules, from 1 July 2015, taxation of the discount on options is deferred until a
later time even where the options do not contain a real risk of forfeiture
Tax concession
The $1,000 tax concession will still potentially be available to the employees who pay tax upfront.
However, the $1,000 tax concession is only available where the employee’s ‘adjusted taxable income’
is $180,000 or less.
Real risk of forfeiture
The facts and circumstances of each scheme and the individual circumstances will determine whether
there is a real risk of forfeiture.
Australian Taxation Office (ATO) Interpretive Decision (ATO ID) 2010/61 broadly states that an ESS
interest acquired by an employee is at real risk of forfeiture if a reasonable person would consider that
there is a real risk that the employee may forfeit or lose the ESS interest, other than by intentionally
taking no action to realise the benefit. The ATO ID explains that the meaning of 'real' in this context is
something more than a mere possibility. In this regard, an ESS interest will not be at real risk of
forfeiture if a reasonable person would disregard the risk as highly unlikely to occur or as nothing
more than a rare eventuality or possibility.
Real risks of forfeiture in a scheme may include conditions where retention of the ESS interests is
subject to performance hurdles or a minimum term of employment.
The ATO ID states there is no real risk of forfeiture where a scheme simply includes a condition
which:



restricts an employee from disposing of an ESS interest for a specified time
allows an employee to request that the ESS interest be forfeited or
provides for an employee to forfeit an ESS interest if they are dismissed for fraud or gross
misconduct.
Where the taxation of the ESS is deferred the discount will be included in the employee’s income tax
return at the earliest of the following times:



when the employee ceases employment
the year in which there is no longer any risk of forfeiture and the restrictions regarding
disposal are lifted or
seven years (15 years from 1 July 2015) after the shares/rights were granted.
Assessable Discount
To calculate the correct value of the discount when valuing the shares or rights the following methods
are appropriate:



where the share/right is quoted on an approved stock exchange, it will generally be valued at
the most recent offer, or weighted average price if more than one offer has been made in the
past week
non-traded shares will be valued in accordance with the valuation of an independent valuer
rights not listed on an approved stock exchange will be valued according to the valuation
tables in the legislation.
30 day rule
Where an employee disposes of their shares or rights within 30 days of the deferred taxing point, the
deferred taxing point becomes the date of sale. Consequently, the capital gain or loss on disposal is
disregarded and the amount of the discount is included in your assessable income in the income year
the deferred taxing point occurred. The calculation of the discount in such circumstances is detailed
below:

if the shares or rights are disposed of at arm’s length, the discount is calculated as the
amount of any consideration you received for their disposal less any consideration you
provided to acquire the shares or rights or

if the shares or rights are not disposed of at arm’s length, the discount is calculated as the
market value of the share or right at the time of their disposal time less any consideration you
provided to acquire the shares or rights.
Transitional rules
For shares or rights granted before 1 July 2009:


employees that elected to defer taxation (beyond 1 July 2009) will be brought into the post 1
July 2009 rules and subject to the real risk of forfeiture test
employees that elected to be taxed upfront will continue to be taxed in accordance with the
pre 1 July 2009 rules (i.e. the taxing point is in the income year when the shares vest or reach
cessation time, whichever applicable).
Employer obligations
Employers are required to report to the ATO details of any ESS interest issued to employees at a
discount.
Employers must also issue an ESS statement which detail’s the discount amounts and the
corresponding label to be included in the employees’ individual income tax returns.
The employer is also required to withhold tax in relation to discounted shares or rights where the
employee has not supplied a Tax File Number (TFN) or Australian Business Number (ABN) to their
employer by the end of the income year.
Tax refunds
A refund of tax paid in relation to ESS interest is available where:



an amount of ESS discount has been, or would be, included in the employee’s assessable
income
the employee has subsequently forfeited the ESS interest (in the case of rights, the employee
lost the right without disposing or exercising the rights)
the forfeiture or loss is not a result of:
o the individual’s choice, except for when the choice was to cease employment or
o a provision of the scheme that has the direct effect of protecting the employee from a
fall in the market value of the ESS interest.
If you have further queries on any details contained within this letter or on any other matter, please do
not hesitate to contact me on [insert telephone number].
Yours faithfully
[Insert Name and Title]
Encl.