Given the enormous interest generated by PM Turnbull’s recent Innovation agenda we have decided to increase our newsletter distribution, broaden the topics of interest to include all Government initiatives affecting the innovation community and to allow other strategic partners and external service providers to provide content in their areas of expertise.
Prior to the rollout of the new Innovation agenda commencing 1st July 2016 we will report on all of the currently available Government assistance programs and tax advantages before switching our attention to the new innovation agenda as it’s rolled out so that we gradually build up a full nomenclature of available support and become a free reference point for the start-up innovation community.
I would like to thank Bill Shew, Chartered accountant and Principal of Whitehawk Advisors for kicking off the first of our many innovation newsletters.
Managing Director, TCF Services.
The Tax and Superannuation Laws Amendment (Employee Share Schemes) Bill 2015 received royal assent on 30 June 2015. The new tax changes will apply to awards granted on or after 1 July 2015.
The new rules reverse a number of unpopular changes which were made to the Employee Share Scheme (“ESS”) tax laws with effect from 1 July 2009, make other improvements to the taxation of ESS interests, introduce additional tax concessions for employees of eligible ‘start-up’ companies and allow for the ATO to approve different methodologies for valuing ESS interests.
The following is a summary of the changes and the opportunities that arise:
Rights with an exercise period
One of the main tax changes made in 2009 was to bring forward the taxing time of options from exercise to either grant or vesting (depending on whether there was a “real risk of forfeiture” on grant).This 2009 change will now be reversed for options granted on or after 1 July 2015. The taxing time of options that are held by continuing employees will generally revert to when those options are exercised.
This means that rights with an exercise period post vesting may provide employees with more flexibility to manage the taxing time on their rights. However, employers considering granting rights with an exercise period should ensure they consider all the flow-on implications of that plan design choice (e.g. whether additional administrative costs are involved).
Options with an exercise price may now come back into favour because reverting to tax on exercise, combined with the changes to the refund rules and lower valuations under the statutory tables, should mitigate the risk of the undesirable tax outcomes that occurred under the 2009 tax changes.
Shares and options that qualify for the new start up tax concessions
The new rules introduce the following additional tax concessions for employees provided with ESS interests in start-up companies at a small discount, subject to certain eligibility conditions being satisfied
This means that:
- in the case of a share, the ESS discount will be exempt from tax and the share will be subject to the Capital Gains Tax (CGT) rules from acquisition and will have an opening CGT cost base equal to its market value at this time; and
- in the case of a right, the ESS discount will not be taxed upfront on the grant date but will effectively be taxed (under the CGT rules) at the time the right (or underlying share, in the event the right is exercised) is disposed of.
This means that the CGT 50% discount will generally be available at that time of sale.
The above tax concessions will only be available for ESS shares acquired at a discount of less than 15% and for ESS rights which are “at, or out of, the money” on the grant date, and where the employer entity is an Australian tax resident, start-up, company.
A “start-up” company is defined as one that is less than 10 years old and with turnover of less than $50mil (the definition excludes listed companies).
Safe Harbour Valuations
The ATO is now developing safe harbour valuation methods and standardised documentation, as a red tape reduction measure.
Further related improvements also include
Where tax is deferred on ESS shares or rights, the maximum deferral period will be extended from 7 to 15 years.
The existing limit of 5% in the ownership interest or voting power which an employee is permitted to have in the provider company in order to potentially access the ESS concessions (i.e. the ‘upfront’ $1,000 reduction or tax deferral) will be increased to 10%.
To determine whether the 10% limit is exceeded, an employee will need to account for the shares which they could obtain on exercising rights they have over shares in the company (whether ESS rights or not).
While these changes may be considered, on face value, to provide a benefit to start ups let us not forget that in order to be eligible for the above concessions in the first place, the scheme must be available to at least 75% of the permanent employees (not consultants) of the company who have completed at least 3 years of service and who are Australian residents, with a real risk of forfeiture of the Shares /Options. We have seen no change to these conditions (note the requirement of 3 years employment (for a start-up) and the issue of shares/rights to employees, not consultants).
These additional concessions are also only available for a 15% discount (no more).
Of course if the company is considered to have little or no value in its early stages of growth, the taxation of the discount – whether an eligible scheme or not – may not be an issue.
In our experience very few small businesses meet the conditions required to defer tax on shares or rights issued to employees. It is therefore important to think laterally in designing and implementing a remuneration and equity plan for your key employees when money is tight.
Effectively implemented, Employee Equity and Remuneration plans allow the owners of privately held businesses the opportunity to attract, retain, and reward key people who are critical to the success and growth of the business.
Whitehawk advisors have advised on and implemented numerous plans designed to achieve the strategic needs of the business while ensuring the best tax outcomes for all parties. You can contact Whitehawk by using the below contact details.
Director – Whitehawk Advisors
Level 11 | 65 York Street | Sydney | NSW 2000 | Australia
GPO Box 4579 | Sydney | NSW 2001 | Australia
T +61 2 9188 9693
D +61 2 9199 1702
M +61 408 435 579