Member Article

Some unexpected changes have highlighted the introduction of new employee share scheme legislation, which received Royal Assent on 14 December 2009. Companies will need to give the legislation close consideration given the impact it will have on employee equity plans, particularly the drafting of plan rules and offer documents.

The new regime will apply to shares or rights acquired from 1 July 2009, and provides for the following:

• a $1,000 tax exemption for 'non-discriminatory' schemes where there is no 'real risk of forfeiture', but subject to a holding period requirement and available only where an employee's 'adjusted taxable income' is $180,000 or less;
  
• tax deferral for shares or rights provided there is a 'real risk of forfeiture', with tax deferred until the earlier of:
  
  
  
  • when the 'real risk of forfeiture' is removed and there are no longer any 'genuine restrictions' on the disposal of the interest;
    
  • in the case of rights that are exercised, when any 'genuine restrictions' on the ability to dispose of the underlying shares are lifted;
    
  • termination of group employment; and
    
  • 7 years after the acquisition of the shares or rights,
  
  
• a $5,000 'salary sacrifice' tax deferral concession, which has now been extended to rights as well as shares, although the rights (or resulting shares) must be subject to a 'real risk of forfeiture'; and
  
• a new annual employer tax reporting and withholding regime, which requires employers to report the details of employee shares and rights, including estimated market values, to both the Australian Taxation Office (ATO) and their employees.

There is concern though that the new legislation denies a tax refund to those employees who have been taxed on their rights (e.g. on cessation of group employment), but who later forfeit those rights as a result of choosing not to exercise them (e.g. because the rights are 'underwater'). This is despite the clear inequities involved and the widespread calls from industry groups and the tax profession to reconsider this proposal.

Companies will need to give the legislation detailed consideration given the impact it will have on employee equity plans, particularly the drafting of plan rules and offer documents. Care will need to be taken when setting plan terms and conditions to ensure employees are not disadvantaged by the new regime. This will require careful review of performance and vesting conditions, the circumstances in which rights or shares may be retained in events such as termination of employment, and the circumstances in which shares may be disposed of.