Improvements to taxation of employees share schemes

Most significantly, the changes proposed under the Exposure Draft seek to repeal changes that were introduced by the previous Government in 2009 that altered the taxation laws relating shares and options granted under employee share scheme. The 2009 changes had significantly compromised the commercial value of employee options and the Exposure Draft addresses this by effectively eliminating the risk that options can be taxed even where they are “underwater”.

The Exposure Draft also introduces tax concessions for the grants of shares and options to the employees of start-up companies (and which should also be available to the non-executive directors of such companies where shares or options are granted in lieu of director fees) subject to certain conditions being met.

While we welcome and are generally supportive of the amendments proposed in the Exposure Draft, in our submission we suggested that the tax treatment of employee share schemes could be further improved by:

• Addressing the triggering of tax liability in respect of unvested or restricted securities under an employee share scheme on cessation of employment to encourage (or at least not deter) the holding of securities by employees beyond cessation of employment.
• Allowing for greater flexibility for security grants to employees and directors of start-up companies by loosening some of the conditions that apply under the Exposure Draft (for example, the requirement that the grants be offered to at least 75% of the company’s employees and that the securities must not vest earlier than 3 years).

If passed, the proposed amendments are expected to come into effect on 1 July 2015.