Taxation of employee share schemes (ESS) - some relief in sight

Following announcements made last year by the Treasury, on 14 January 2015, the Australian Government released exposure draft legislation to amend the income tax treatment of employee share schemes.

Key proposed changes include:

• in respect of shares or rights issued as part of an employee share scheme where income tax is deferred, reversing some of the changes made in 2009 to the point at which tax becomes payable in respect of those shares or rights; 

• for eligible start-ups, providing a further tax concession where the shares or rights are issued at a small discount and are held by the employee for at least three years.  In the latter event:

  • discounts received on certain shares will be exempt from income tax; and 

  • discounts received on certain rights will generally be treated as capital and be taxed under the capital gains tax rules.

• allowing the ATO, in conjunction with industry, to develop safe harbour valuation methods so that the process for establishing and maintaining an employee share scheme will be streamlined.

The proposed amendments to the legislation are intended to apply to employee share scheme interests acquired after 1 July 2015.

Interested parties are invited to comment on the draft legislation by 6 February 2015.

We are reviewing the draft legislation and will shortly provide a more comprehensive report on the proposed changes.