Employee share schemes

Motivationally speaking, there's not much that beats a financial reward. And as it is generally accepted that business owners are the most driven to see their business succeed, giving staff a real stake in an enterprise through owning shares in it is an incentive, and a reward, that many companies have utilised.

Having a vested interest in a business can also give employees a sense of participation, and a solid reason to want to see the company grow and profit. Loyalty can also be encouraged, and valued staff retained.

Shares or options in the company under these schemes are generally made available to staff at no cost or at cheaper prices than market value, but the difference between that value and what an employee pays is referred to as the 'discount', and that discount is generally treated as assessable income of the employee and taxed accordingly.

But due to legislative changes, it is necessary to make a distinction between shares that are acquired under an employee share schemes
that are pre-July 1, 2009 and those that are post-June 30, 2009 (that is, a change in treatment switched on at midnight between 2008-09 and 2009-10).

Shares and other such rights acquired before this switch-over will still be taxed under the previous share scheme provisions (more on this below) and shares or rights acquired after the switch-over will be taxed under new provisions.

One feature of the schemes that made them attractive was the allowance of up to $1,000 being deemed tax-free if an employee chose to be taxed on the (discounted) value of the shares in the same year they were acquired. Under a 'qualifying' scheme, an employee could choose to defer tax until the shares or rights were disposed of, but would then lose the $1,000 tax-free allowance.

The new rules still see employees liable to tax on the discount in the year that shares or rights are acquired, but with no option to defer tax except for situations regarding 'real risk of forfeiture' (more below) and where the interests are acquired under certain salary sacrifice arrangements.

Nowadays, the tax-free element is only available to employees who earn less than $180,000 (which targets the higher paid executives and the share scheme tax rorts that the Tax Office used as justification for the changes).

A more limited deferral option has also been settled on, which places a seven year time limit on deferring tax, with it only being available where schemes have a 'genuine risk of forfeiture' or shares worth no more than $5,000 are received under a salary sacrifice deal.

What 'genuine risk of forfeiture' means is that there is a real risk the employee may lose, or never receive, the actual shares or options to which they become entitled under a scheme. An example would be putting conditions that have to be met for shares to be made available, like the business meeting certain financial targets. Or, in a falling market, where the value of the shares could fall to nil or the business is in danger of going into liquidation. However, a condition that the employee cannot sell the shares for a certain period of time does not count as a real risk of forfeiture.

Reviewed June 22, 2012

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