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.
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).
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.
The exposure draft is absent guidance on the proposed changes will affect reporting for ESS transactions.
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.
Stay tuned for new developments on the progression of the exposure draft and potential implementation.
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.