A taxpayer has been found liable for a tax bill of $106,058 in relation to shares they acquired as part of an employee share scheme (ESS) with their previous employer, NewSat Limited, a now insolvent company with a share value of nil. 

On 14 August 2018 the Administrative Appeals Tribunal (AAT) confirmed the $106,058 assessment that was determined by the Federal Commissioner of Taxation (Commissioner) for the 2014 income year. The case is a cautionary tale for employees considering participating in an ESS and an important lesson for employers looking to motivate and reward staff through equity arrangements.

In Fox v FC of T, the employee was an executive assistant to the chief executive officer of NewSat Limited. In 2011 she was offered the opportunity to participate in the company’s ESS. Under the ESS the employee was granted ‘Performance Rights’ at no cost. The employee acquired Performance Rights on two occasions, in October 2011 and in June 2012.

In 2014  the taxpayer converted the Performance Rights to shares when a vesting event occurred. She was also notified that she had acquired 100,000 shares with a taxing date of 7 October 2013.

The Commissioner determined the additional 100,000 shares should be included in the assessable income of the taxpayer for the 2014 income year. The tax liability determined by the Commissioner was $106,058, representing the difference between the amount paid (nil) and the market value of the ESS interests at the taxing date.

NewSat Limited was placed into administration in early 2015 and the taxpayer was made redundant shortly after. By late 2015 the liquidators confirmed that it was unlikely that any distribution would be made to shareholders in the course of winding up the business. As a result, the taxpayer’s shares had no value.

In objecting to the Commissioner’s assessment the taxpayer argued that the original 2011 ESS agreement which ultimately led to the share acquisitions should be void as she was coerced into signing it. The taxpayer stated that senior management exerted excessive pressure on her to sign and rushed her decision process. However the AAT found no evidence to support this assertion by the taxpayer. The Tribunal noted that the taxpayer had held the document for 6 days prior to signing, had participated in more than one tranche of ESS offerings and further that the document contained clear directions to individuals that they should seek independent advice on the tax implications of the scheme.

ESS have historically been a valuable resource of companies seeking to reward, retain and motivate key staff. With changes to the taxation of ESS by the Gillard Government in 2009, the Australian economy saw a slowing in the number of companies implementing ESS. However with recent ESS concessions introduced for startups and a renewed understanding by established companies that they may need to offer employees “skin in the game” in order to retain and motivate their key staff, ESS are again becoming a discussion point at company board meetings.

Fox v FC of T highlights the need to carefully consider the ESS being proposed and whether it is the most efficient and effective scheme for both employees and the company. The potential of being faced with a significant tax bill and no value to show for it is an alarming reality, but ultimately one that, with careful planning and understanding can be avoided.

If you would like advice on an ESS you are considering participating in, or if you are a company looking to offer staff equity and would like advice on this, please contact:

Laura Spencer
Associate
Sladen Legal
T +61 3 9611 0110
Level 5, 707 Collins Street, Melbourne, 3008, Victoria, Australia  
lspencer@sladen.com.au

Daniel Smedley
Principal | Accredited Specialist in Tax Law
Sladen Legal
M +61 411 319 327 |  T +61 3 9611 0105
Level 5, 707 Collins Street, Melbourne, 3008, Victoria, Australia  
dsmedley@sladen.com.au