13 May 2021
On 11 May, the Australian Treasurer handed down the 2021-22 Budget.
The Treasurer announced various taxation measures aimed at reducing the unemployment rate. Amongst these measures was the removal of a tax trigger for tax-deferred Employee Share Schemes (ESS) at the point of participants leaving employment.
Currently, when an individual leaves employment and retains any unvested shares under an ESS in Australia, taxation will generally be triggered at that time.
The Australian Government has proposed removing this earlier taxation point for share and option schemes. The moment of taxation will then 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).
This change will apply to ESS interests issued from the first income year after the date of Royal Assent of enabling legislation (Australian income years commence on 1 July).
The Government also announced that it will remove regulatory requirements for ESS where employers do not charge or lend to the employees offered the ESS.
These measures are intended to help Australian companies to engage and retain the talent they need to compete on a global stage.
We will update you further when we have confirmation on the date these rules come into effect.
Taxation on cessation of employment can result in individuals suffering a “dry” tax charge (i.e. an unfunded charge as no share sale proceeds will be available to fund the tax charge). This can damage the effectiveness of “incentive” awards. 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. Whilst this removal of early taxation for leavers is beneficial for ESS, the new rules being applicable to issues of ESS interests following implementation means the benefits may not be recognised for some time.
If you would like to discuss this update, or anything else, please do contact us.
Chris Fallon and Emilie Sylvester