The House of Representatives Standing Committee on Tax and Revenue has presented its report on employee share schemes, entitled Owning a Share of Your Work: Tax Treatment of Employee Share Schemes.
On 6 February 2020, the Treasurer initiated a Parliamentary inquiry and report on the tax treatment of Employee Share Schemes (ESS). It was to investigate the impact and effectiveness of changes implemented in 2015. Specifically, the terms of reference were to investigate the effectiveness of the 2015 ESS changes and examine:
- how effective the changes in 2015 have been in their goal of bolstering entrepreneurship and supporting start-up companies;
- the costs and benefits of these concessional taxation treatments, and deferred taxing points for options, to the broader community;
- whether the current tax treatment of ESS remains relevant to start-up companies and whether any changes are appropriate to ensure the taxation treatment remains relevant;
- how companies currently structure their ESS arrangements and how taxation treatment affects these decisions; and
- the challenges faced by companies in setting up an ESS arrangement and how the standard documents by the ATO, and introduced in 2015, assist this process and whether additional improvements should be made.
The document is technical, as is to be expected, and runs to over 50 pages. It is a single document, ie it contains no dissenting views. This can perhaps be seen as atypical for a committee that was split 5-3 on party lines. It may mean that any proposed changes to the ESS rules will not be subject to partisan debate.
Note, though, that the Government had earlier released draft legislation and draft regulations which cover some of the recommendations. This is discussed after coverage of the report, ie under the heading below.
This report adopts two “roadmaps” as recommendations. The first roadmap is contained in Recommendations A and B. In the event that the Government would prefer a “more iterative approach”, the remaining recommendations present an alternative roadmap. These individual recommendations are listed below.
The Committee recommends that ESS be treated as capital for the purposes of taxation. That a tax liability would arise on the disposal of the assets granted through an ESS using the current CGT regime.
The Committee recommends that the Government grant “regulatory relief” to companies issuing shares under an ESS, so that disclosure requirements are minimal unless employees are being asked to contribute financially.
There are 18 separate recommendations, which are outlined below. For those of you who like to jump to the back of the whodunnit to find out who’s the killer, look at Recommendations 6, 7, 8, 9, 11, 15 and 17.
- Recommendation 1: the ATO obtains and publishes up-to-date data on ESS use;
- Recommendation 2: the ATO establish a public awareness program to inform current and potential business owners of the existence and benefits of ESS, and where and how to access the available resources;
- Recommendation 3: any changes to legislation resulting from this inquiry and the 2019 Treasury consultation should be reviewed by the Productivity Commission 5 years after the date of commencement of the changes;
- Recommendation 4: the Productivity Commission investigate how the use of employee ownership trusts can be facilitated and encouraged;
- Recommendation 5: the Productivity Commission explore the structure of ESS and their related taxation treatment in other countries, and how this could be adapted to the Australian taxation system to support productivity and innovation;
- Recommendation 6: the following changes be made to the definition of a “start-up” for tax concession purposes: (i) the definition be extended to listed companies that otherwise fulfil the criteria to be considered a “start-up”, (ii) the aggregated turnover test be removed to relate to wholly owned groups or entities that can be shown to be controlled by the entity as per the definitions of control under the Corporations Act 2001;
- Recommendation 7: the definition of “safe harbour” valuation contained a legislative Instrument be extended to all unlisted companies (this is presumably the Income Tax Assessment (Methods for Valuing Unlisted Shares) Approval 2015 (although this is not spelt out in the report, but rather is referred to as the “Income Tax Assessment (ESS 2015/1)”);
- Recommendation 8: increasing the $1,000 limit in s 83A-35(2)(a) of ITAA 1997 to $50,000;
- Recommendation 9: remove the taxation point on the cessation of employment by removing s 83A-115(5) and s 83A-120(5) of ITAA 1997;
- Recommendation 10: the Government proceed with the proposals announced on 13 November 2018 and discussed in the Treasury Employee Share Schemes Consultation Paper dated April 2019;
- Recommendation 11: the requirement for a maximum 15% discount under the ITAA 1997 start-up regime be scrapped;
- Recommendation 12: the ATO simplify its documentation to no more than two pages, and make recommendations to the Government of any legislative changes that could further simplify this process. It also recommends that the ATO establish a “one stop shop” approach to ESS, including documentation, processes and ASIC reliefs to enable start-ups in particular to find all they need in one place, combined with a help line to answer any questions specific to their circumstances;
- Recommendation 13: the ATO re-instate the option for lodgement of the ESS annual report in a spreadsheet format;
- Recommendation 14: a “safe-harbour” methodology be introduced for ESS buy-backs for the purposes of determining the dividend/capital split and administrative treatment be allowed when no part of the purchase price paid under an ESS buy-back is deemed to be capital;
- Recommendation 15: the ATO clarify whether s 109F(4) of ITAA 1936 and s 245-35(a) of the ITAA 1997, and ATO ID 2003/317, mean that FBT is not in fact payable for discharged ESS loans;
- Recommendation 16: the ATO include in its examples of “merely incidental” activities in TR 2009/13 (what is an employee share trust) actions that are taken in common corporate transactions such as rights issues, demergers and other capital raising transactions;
- Recommendation 17: removing the “real risk of forfeiture” requirement for shares and removing the 75% offer requirement for shares; and
- Recommendation 18: the ATO expand its model documents to include documents similar to those produced by the UK Department for Business Innovation and Skills.
Draft legislation: removal of cessation of employment as taxing point and other measures
As noted above, Treasury had earlier released exposure draft legislation proposing changes to the regulatory and tax arrangements ESS), including the removal of the cessation of employment as a taxing point. The proposed changes seek to implement the Government’s 2021-22 Budget proposal to make it easier for businesses to offer ESS.
By way of reminder, the Draft Bill and Regulations propose changes to:
- amend Subdiv 83-A of the ITAA 1997 to remove the cessation of employment taxing point for tax-deferred ESS that are available for all companies (the above Recommendation 9). Tax would instead be deferred until the earliest of the remaining taxing points;
- completely remove the Corporations Act 2001 requirements for ESS offers to employees who do not pay or incur debt to participate in these schemes;
- increase the value cap, under which Corporations Act requirements do not apply, to $30,000 for all other ESS offers of unlisted companies (modified Recommendation 8);
- consolidate exemptions and class order relief from disclosure, licensing, hawking, advertising and other obligations under the Corporations Act;
- expand relief for unlisted companies to include contribution plans and limited or no recourse loans, where an employee can make a monetary contribution to acquire eligible financial products; and
- relax the requirements to lodge disclosure documents.
It will be interesting to see how much the above recommendations impact the draft legislation. The consultation process for the draft legislation closed on 25 August 2021.
This article was first published in Thomson Reuters’ Weekly Tax Bulletin.