Australia – Removal of Cessation of Employment Taxing Point for ESS Interests

Background

Under Australia’s employee share scheme rules, a discount on shares, rights, and options (ESS interests) given to\employees in respect of their employment is taxed either at the time of grant or on a deferred basis.  If the ESS grant is subject to tax on a deferred basis, prior to the change, tax would be deferred generally until the earliest of:

• vesting, exercise (in the case of options), and removal of any sale restrictions;
• cessation of employment; and
• 15 years from grant.

Employers have an Australian ESS reporting obligation in respect of any ESS interests provided to their employees working in Australia.  Employers are required to file an Annual Report to the Australian Taxation Office (ATO) by 14 August following the end of the financial year and issue an ESS statement to employees with the taxable value of their ESS interests by 14 July where a taxing event has occurred in the financial year.

The cessation of employment as a taxing point had been a major area of concern for many stakeholders of company share plans, and there had been lobbying by interest groups for its removal for a number of years.    

Often terminated employees who have been made redundant are treated as “good leavers” and are able to retain some or all of their ESS interests as a result.  These employees were required to pay tax on those ESS interests at a time when they had yet to realise any value from those interests, and this created a potential cash-flow issue.  In addition, these employees who have ceased employment may end up paying tax on their ESS interest when they ceased employment at a higher share price or value than what the shares are actually worth when they are able to dispose of the shares.

For cross-border employees, the cessation of employment taxing point for ESS interests also created additional complexities due to the misalignment with the common taxing point for other foreign jurisdictions and implementation of tax-equalised arrangements.  

An Organisation’s Employee Share Plans: Things to Consider

For employees ceasing employment on or after 1 July 2022, this change will now result in tax being deferred until the earlier of the remaining taxing points (where the employee share scheme qualifies for tax deferral).  This change may require an organisation to consider the following:   

1.      Review employee communications:  The success of any employee share scheme requires employees to understand the tax implications associated with participation.  Organisations may wish to consider refreshing their employee equity communications to incorporate these updates or arranging a presentation to help employees understand what it means for them.

2.      Data preparation for ESS reporting:  Organisations will need to continue to keep good records of ESS awards that will have a taxing point post-termination as well as personal details (e.g., tax file numbers, correspondence addresses) of former employees to facilitate any future ESS reporting obligations. 

3.      “Indeterminate Right” plans: An “indeterminate right” is when an employee’s entitlement to a share or a specific number of shares is not certain at the time of grant of the right.  For example, the plan rules may allow the delivery of cash or shares at the discretion of the employer at a later date, or the award is based on a specified total value rather than a specified number of shares.  Once it is known that the “indeterminate right” will result in the employee receiving a share, the employer is required to treat it as if it was always an ESS interest.  For organisations that use indeterminate rights and have employees who terminate employment prior to 1 July 2022, specific advice may need to be sought in relation to the relevant taxing point arising from these changes.

PEOPLE SERVICES IN AUSTRALIA

Special Contributors: Priscilla Tang, Belinda Rong

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