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Australian Treasury Introduces Draft Legislation to Simplify the Taxation and Securities Restrictions for Share-Based Awards

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October 01, 2021 | Jennifer Namazi

Australian Treasury Introduces Draft Legislation to Simplify the Taxation and Securities Restrictions for Share-Based Awards

The Australian Treasury recently released draft legislation that would result in changes to tax and securities law restrictions for employee share schemes (ESS).

This exposure draft was anticipated and follows an official government announcement earlier this year in the 2021-2022 Australian federal budget.

The proposed changes are intended to remove red tape make it easier for companies to implement employee share schemes.

The new reforms would apply on an exemptions basis to alleviate companies compliance with a number of overly onerous regulatory requirements. 

Understanding Proposed Australian Employee Share Scheme Tax and Restricted Law Changes in a Nutshell

A Baker McKenzie Client Alert on the topic summarizes the draft reform as follows:

If implemented, the proposals would result in:

  • the removal of the cessation of employment taxing point for share-based awards granted to employees; and 

  • broader securities law exemptions, enabling both listed and unlisted entities to make ESS offers without needing to prepare a prospectus or hold an Australian financial services licence (AFSL) – however, the draft legislation contains some new unfortunate restrictions for options granted by listed companies (as further detailed below).

Cessation of Employment Would No Longer Be Taxation Point for Share-Based Awards

The draft legislation simplifies taxation of share-based awards by removing the cessation of employment as the taxable event.

Instead, the taxable trigger for employees on a tax-deferred ESS would occur at the earlier of:

  • stock options and rights (like restricted stock units (RSUs)): when the option is exercised or the RSU vests and there is no risk of forfeiture and no restriction on disposition.

  • awards (like restricted shares): the point in time when there is no risk of forfeiture and there is no restriction on the disposition of the shares.

  • 15 years from the grant date.

Shares sold within 30 days after the time frames outlined in the first two bullet points will be taxed based on the sale date.

Reporting of Employee Share Scheme Transactions

The exposure draft is absent guidance on the proposed changes will affect reporting for ESS transactions.

Timeline for Australia’s Proposed Changes to Taxation Point for Employee Share Schemes

No specific timeline has been provided for the approval process and it’s unknown when adoption of any legislation will occur.

However, the draft exposure does note that removal of the cessation of employment as a taxing point will only apply to awards granted on or after the next July 1 following Royal Assent.

The measure will not apply to awards granted prior to July 1 of the year the change comes into effect. Baker McKenzie suggests it’s possible that amending legislation will receive Royal Assent prior to July 1, 2022, but there is no guarantee.

Australia Proposes Changes to Regulation of Employee Share Scheme Offers

Baker McKenzie’s client alert explains possible changes to the offer of ESSs as follows:

The exposure draft legislation also implements changes to the way in which ESS offers are regulated under the Corporations Act 2001 (Cth) (the CA).

As matters currently stand, the key exemptions for ESS offers are contained in ASIC Class Orders 14/1000 and 14/1001.  These exemptions enable entities to make ESS offers without needing to prepare a prospectus (or similar document) or hold an AFSL.

The conditions in Class Order 14/1000 are typically easy to satisfy, and the exemption has proved a popular way for listed entities, both Australian and foreign, to operate employee equity plans in Australia.  In contrast, Class Order 14/1001, which applies to unlisted entities, contains a number of restrictive conditions which have made it much less easy to use.  In particular, Class Order 14/1001 can only be used where the total value of awards granted to any one employee in any 12-month period is no more than AUD 5,000.

In broad terms, the proposed changes involve replacing the two Class Orders with analogous exemptions in the CA. The exposure draft legislation departs from the Class Orders in a number of ways which will likely make it more attractive at least to unlisted companies, but introduces some unfortunate new restrictions for options granted by listed companies.  We believe these restrictions may be drafting errors, but this remains to be seen.

The new rules at a glance

The key features of the proposed new rules are as follows:
  • Offers by listed or unlisted companies that are restricted to employees and that do not require payment of money can be made without any prescribed form of disclosure and without the need for an AFSL.
  • Offers that require monetary payment, or that are extended to independent contractors as well as employees, will also be conditionally exempt from the prospectus and AFSL requirements.  A "notice of intent" will need to be filed with ASIC, and issuing companies will need to provide employees with an "ESS offer document".  Unlisted companies making such offers must also comply with a "value cap" of AUD 30,000.
  • Offers of options by listed companies are only covered by - and are therefore only exempt under - the new rules if the options are listed (which almost certainly will not be the case) or if the options have been granted with a zero exercise price.
  • Offers that require monetary payment must comply with an "issue cap" (5% for listed companies and 20% for unlisted companies).
  • The existing statutory exemptions (such as the senior manager and the 20-in-12 exemptions for grants of options or other securities) will remain available for offers that are not covered by the new rules.  For offers covered by the new rules, these exemptions will not be directly available, but there are carve-outs designed to ensure that offers that would otherwise have been exempt under existing legislation continue to be treated in the same way.

Stay tuned for new developments on the progression of the exposure draft and potential implementation.

Resources for Australian Stock Compensation (Employee Share Schemes) 

For additional information on taxation and securities (and other) regulations for stock compensation (employee share schemes) in Australia, view our Australia Summary Guide (updated in February 2021) or visit our Australia website page

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