The Standing Committee on Tax and Revenue recently published its report “Owning A Share of Your Work: Tax Treatment of Employee Share Schemes (ESS)”.
The Committee, made up of eight members from the House of Representatives, specifically considered the effectiveness of the changes to the ESS tax legislation in 2015 and whether the current rules promote employee share ownership. This review follows multiple iterations of the legislation over the last twelve years as well as Government proposals and think tanks to change the ESS landscape and make Australia more globally competitive.
The inquiry found that employee share schemes are critical for Australia’s success in attracting, incentivising and retaining key talent, encouraging entrepreneurship and driving higher workforce productivity. Unfortunately the current legislation falls well short, with complex rules and low prevalence of employee share ownership compared to other countries such as the UK and US.
The recommendations are far reaching and if legislated, would have a big impact on the employee share scheme landscape in Australia. The report was tabled in Parliament on 23 August 2021 for government consideration. The big question is whether the recommendations will form part of the ESS tax amendments currently being developed and to what extent changes can be expected prior to the Federal election?
What Are The Key Recommendations?
A total of 18 recommendations were contained in the report, including the change announced in the May budget to remove the taxing point at the cessation of employment. (See our recent blog Tweaks To Employee Share Rules Provide Leverage & Flexibility) We have outlined below what we consider are the three recommendations which could have the biggest impact on employee share ownership in Australia.
Recommendation 1: Share Discount Limit Scrapped Under “Start-Up” Concessions
For companies which currently meet the definition of a start up (detailed in recommendation 2 below), there is scope to offer shares to employees at a discount of up to 15%, with no income tax payable.
The Committee recommendation is to scrap the current 15% threshold on the basis that it is both limiting the effectiveness of promoting share ownership and also creating inherent valuation challenges in setting the discount.
TRP View: Removal of the threshold will enable emerging companies to provide free shares to employees which are not subject to income tax (only capital gains tax at sale). This will provide a significant tool for employers to attract and retain key staff.
Recommendation 2: Start Up Concessions To Apply to Listed Companies
Current income tax concessions apply for grants of ESS interests by “start-up” unlisted companies. To satisfy the start-up definition, the company (or group) must:
- Be less than 10 years old
- Have a turnover of less than 50 million
- Not be listed on the Australian stock exchange
The Committee has recommended that the start up concessions should also apply to listed companies which meet the other tests.
TRP View: Extending the scope of the start up definition would allow emerging listed companies to also access the concessions, providing the opportunity to grant shares or options to employees which are not subject to income tax.
Recommendation 3: Increase the “Tax Exempt” Plan Limit from $1,000 to $5,000 per year
Currently there is scope to make an annual grant to employees of $1,000 worth of shares on a tax-free basis (to the extent the employee’s taxable income is $180,000 or less). The $1,000 threshold has been in place since July 1996 and the Committee has recognised that there is a need for the dollar threshold to be lifted to provide a more meaningful incentive to staff. The proposed increase to $5,000 matches the current threshold for salary sacrifice plans.
TRP View: The proposed increase for the tax exempt limit to $5,000 would provide a relatively straightforward way to provide meaningful share ownership to employees without an income tax burden.
Next Steps and Take Aways
The Committee recommendations will be considered by the Government in the coming months as part of the overall ESS tax reforms. The Reward Practice will keep you informed of any proposed changes to the ESS regime and what they may mean for your company.