From 1 July 2015, ESS changes allow taxing points to be deferred and introduce a significant new concession for 'start-up' companies.
The maximum period of tax deferral increases from 7 years to 15 years.
The deferred taxing point for options (and for other rights, such as performance rights) effectively moves from vesting of the options to the exercise date of the options.
Deferred taxation is no longer limited to options issued subject to a 'real risk of forfeiture'. The deferred taxation points will also be available if:
- there is a genuine disposal restriction preventing the immediate disposal of the options
- the plan rules expressly state that the plan is subject to deferred taxation
This new legislation removes some of the uncertainties in regarding what constitutes a 'real risk of forfeiture'. Furthermore, the deferring of the taxing point for options will, in our view, make the use of option plans administratively easier in the future. However, the benefits of upfront taxation for options, with any increase in value of the option being taxed as a discount capital gain has now been removed.
Concessions for start-up companies
A significant concession for start-up companies is the ability to issue certain shares or options to employees without the employee being assessed on the receipt.
To be an eligible start-up company, the company has to:
- be unlisted
- be incorporated for less than 10 years before the share or option is granted, and cannot be part of a corporate group in which any other company has been incorporated for more than 10 years
- have an aggregated turnover in the previous tax year of $50m or less
- be an Australian resident company for tax purposes
In order for the 'start-up' concession to apply:
- shares must be issued at a discount of no more than 15% to market value
- options must have an exercise price equal to or greater than the current market value of a share
The discount on shares or options issued by an eligible 'start-up' is not taxed to the employee under the ESS provisions. Instead, the employee is taxed under the capital gains tax (CGT) rules, paying tax only on an eventual disposal of the shares or options.
Employees who acquire shares that qualify for the start-up concession will benefit from the 50% CGT discount when they sell their shares (as long as the individual has held their shares for at least 12 months).
Employees who acquire options that qualify for the start-up concession will benefit from the 50% CGT discount when they sell their share (as long as the individual has held their options for at least 12 months). Employees will no longer be required to hold their shares received on exercise of their options for at least 12 months to access the discount.
Considering the restrictions placed on qualifying as an eligible start-up, companies should seek specific advice before committing to an ESS on the assumption that they are a start-up.