Employee Share Schemes – taxation improvements | KPMG | AU

Employee Share Schemes – taxation improvements

Employee Share Schemes – taxation improvements

On 14 January 2015, the government released an Exposure Draft Bill on its promised changes to the Employee Share Schemes (ESS) rules. KPMG has prepared a brief to keep you updated on these changes that will help realign the Australian tax treatment of ESS, in particular share options, with international best practice.


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Employee Share Schemes – taxation improvements

From 1 July 2015 share options will once again become taxable at exercise rather than being taxable at the time of vest as at present. This reversal of the controversial 2009 changes will give companies the opportunity to consider whether share options are appropriate in their particular circumstances.

Other changes that will positively impact all companies include:

  • the opportunity to defer taxation for grants of ESS rights (but not shares) that are not subject to a real risk of forfeiture but only a restriction on disposal. Taxation of the ESS interest can be deferred until the disposal restriction lifts
  • maximum deferral period will increase from 7 to 15 years
  • employees with ownership and voting rights up to 10 percent (increased from the current limit of 5 percent) will be eligible for deferral of taxation on ESS grants
  • safe harbour valuation tables have been revised to reflect current market conditions and, as a result, generally reflect lower values than the existing tables
  • the Commissioner will have a discretion to approve other safe harbour valuation methodologies, enabling companies to use a methodology that is more appropriate for their circumstances, improve certainty and reduce compliance costs
  • allowing for a refund of income tax when an employee is taxed on their rights to acquire shares (e.g. options) and the rights lapse without being exercised.

Startup concessions

The Exposure Draft sets out the rules for concessions for startups and effectively allow for:

  • income tax exemption on discounts up to 15 percent on grants of shares
  • taxation under the CGT rules for options that are granted with an exercise price no less than the market value of the share at time of grant.

The definition of a startup is limited and, of note, excludes any listed company.

While these changes are most welcome, we would like to see the removal of the automatic taxing point that arises on cessation of employment, and an extension of the startup concession to certain listed companies.

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