It’s no secret that the appeal of Employee Share Schemes (ESSs) is undermined by complex legislation and confusion regarding upfront or deferred taxation.  Such sentiments have once again inspired recommended reforms,  this time by the House of Representatives Standing Committee on Tax and Revenue, in a recent report. (Report)

While the Federal Government’s 2021 budget included the removal of cessation of employment as a “deferred taxing point” (discussed here), the Report provides further recommendations that, if legislated, would assist to simplify the taxation of ESSs and potentially encourage increased adoption of ESS interests in the future.

The recommendations in the Report (arising primarily from submissions made by numerous professional bodies) include:

1. Taxing ESS interests exclusively under capital account (currently the discount component is taxed on revenue account, either on an upfront or deferred basis);

2. Amending the definition of a ‘start-up’ to include listed companies that would otherwise satisfy the criteria to be a ‘start-up’;

3. Extending the ‘safe harbour’ valuation methodology contained in Legislative Instrument – Income Tax Assessment (ESS 2015/1) to all unlisted companies.

4. Removing the requirement for a maximum 15 per cent discount under the start-up regime;

5. Removing the “real risk of forfeiture” requirement and the “75 per cent offer” requirement for shares.

The release of the Report suggests that further and much-needed reform on the taxation of ESS interests may be on its way. 

If you have any questions, please contact one of our experts:

Daniel Smedley
Principal | Accredited Specialist in Tax Law
T +61 3 9611 0105 | M +61 411 319 327
E: dsmedley@sladen.com.au

Meagan O’Connor
Principal
T +61 3 9611 0106 | M +61 438 531 978
E: moconnor@sladen.com.au

Edward Hennebry
Senior Associate
T +61 3 9611 0113 | M +61 405 847 261
E: ehennebry@sladen.com.au

Laura Spencer
Senior Associate
T +61 3 9611 0110 | M +61 436 436 718
E: lspencer@sladen.com.au