Share schemes viable
Sydney Morning Herald
Wednesday August 26, 2009
The strategy To understand the changes to taxation of employee share schemes.Weren't they taxed out of existence in the last federal budget? If the budget changes had gone ahead as planned, most plans would not have been worth the trouble. Indeed many companies suspended even their most basic share plans following the budget as they would have only remained attractive to employees earning less than $60,000.But draft legislation released earlier this month has softened the changes to the extent that for many employees, share schemes will still be viable.So what's changed? Let's start with those basic schemes first. Under the old rules, companies could offer employees the chance to take up to $1000 a year of shares tax-free. The Government wanted to limit this to employees with an adjusted taxable income of less than $60,000 but that has now been increased to a much more reasonable $180,000. So for all but high-income earners, that benefit remains.The budget also included a measure to tax shares and options in the year they were received, rather than allowing employees in qualifying schemes to defer tax on the shares €“ thus removing any tax incentive to take part of your remuneration as shares. According to a recent briefing paper by MLC's technical services department, deferral will now be allowed for schemes where there's a "real risk of forfeiture" and salary sacrifice-based schemes limited to shares worth $5000.Qualifying schemes will need to meet certain conditions and employees will no longer be able to decide for themselves whether to pay tax upfront or defer. The structure of the scheme will determine whether you pay tax upfront or later on.What's this real risk of forfeiture all about? It means there has to be a genuine chance that the shares won't be vested with you within a particular time. For example, some share schemes merely prevent you from disposing of the shares or options for a certain time. MLC says that won't be regarded as a real risk of forfeiture. But if there are conditions that must be fulfilled before you receive the shares €“ such as meeting performance hurdles or remaining with your employer for a fixed period €“ the scheme may qualify. But MLC says if the conditions are so broad that everyone could fulfil them (such as a requirement not to engage in fraud or gross misconduct), the Tax Office may not consider them to be truly at risk.How long can the tax be deferred? For shares, tax will generally be payable when there is no longer any risk of losing the share and no restriction on disposing of it. Leaving your employer will also trigger a "taxing point". The maximum deferral period will be reduced to seven years.For rights to shares, the treatment is more complicated. Employees issued rights to shares (such as options) will be taxed when there is no longer a real risk of them losing the right and no restriction on exercising or disposing of it. But if the underlying share is subject to forfeiture and restriction, the taxation point is when the restrictions no longer apply to the share. For share schemes in which the tax is paid upfront, the Government will also amend the rules to limit refunds to situations where executives have failed to meet performance hurdles or minimum employment requirements €“ not to commercial losses made when the underlying shares fall in value.When do the changes apply? They are intended to apply from July 1 this year, though legislation has not yet been passed. A majority Senate Economics Committee inquiry released last week recommended introduction of the new rules be delayed until the Henry review of taxation has reported its findings, as it is also examining tax on employee share schemes.With this uncertainty, both employers and employees would do well to tread carefully until legislation is passed.
© 2009 Sydney Morning Herald
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