17 February 2022
We are delighted to update you on a welcome change to the taxation of employee share schemes (ESS) in Australia.
In May last year, we reported on a proposal by the Australian government to remove the tax point for tax-deferred ESS that takes affect on cessation of employment (here). It was hoped that this proposal would come into effect at the start of the last tax year (i.e. 1 July 2021) but the tax change was caught up in a more general consultation on the operation of ESS in Australia. Fortunately, the proposal was split off from that ongoing review and was included in the Corporate Collective Investment Vehicle Framework and Other Measures Bill 2021, which was passed by the Australian Federal parliament on 10 February. The Bill still requires Royal Assent but the tax reform is due to come into affect on 1 July 2022.
Under the current rules, a tax trigger for tax-deferred ESS (i.e. where the moment of tax has been deferred from grant/award to exercise/vesting) arises at the point when an employee ceases to be employed but retains any unvested shares under the ESS. This trigger has long been seen as unfair to employees as it can give rise to a dry tax charge (i.e. an unfunded charge as no share sale proceeds will be available to fund the tax charge), particularly if the employee is restricted from selling the shares under the terms of the ESS.
Under the new rule, the moment of taxation will generally be the point at which the award is no longer at risk of forfeiture and there are no restrictions on disposal (in practice this would be the point of vest of a conditional award or exercise of an option, as is more common globally).
When will the "change" take effect?
One positive result of the delay in implementing the proposal is that the removal of cessation of employment as a taxing point will now apply to all new and existing ESS that have not reached a taxing point before the proposal comes into force on 1 July 2022. Previously, the proposal was only going to apply to awards granted after the date that the reform took effect.
Plans to simplify the securities law exemptions continue to be subject to separate consultation. The most recent consultation period ended on 4 February.
This change will help to bring Australia in line with many other jurisdictions, making administration of leavers much easier for global companies and giving "good leavers" the ability to settle taxes due at the applicable tax point. Where appropriate, companies should consider whether to advise participants with outstanding awards of this change to the tax treatment. Where companies have structured their ESS plans to make provision for the early tax treatment on cessation of employment (e.g. by providing for accelerated vesting or the removal of sale restrictions), they may wish to review those plan terms.
If you would like to discuss the effects of the above change on your awards, please get in touch.