ESS tax bill introduced

On 25 March 2015, the Tax and Superannuation Laws Amendment (Employee Share Schemes) Bill 2015, which has the potential to affect remuneration frameworks and strategies for start-up companies, was introduced into federal parliament. 

The changes will create new opportunities in providing employee equity; remove some of the complexity of the existing law; expand the potential range of instruments which may be used; and may require changes to the existing plan rules, particularly for tax deferral plans.

The new rules are scheduled to come into effect on 1 July 2015.

According to remuneration firm, Guerdon Associates, under the bill, options and rights for all companies subject to deferral will be taxed when they are exercised rather than when they vest. Options and performance rights no longer need a real risk of forfeiture to access deferred taxation.

The maximum period for tax deferral will be extended from seven to 15 years, while refunds can be obtained from the tax paid on options that are not exercised.

Start-up companies are expected to gain from special concessions that will allow employees to receive fair market value options tax free and then only pay capital gains tax on the disposal of the share acquired on exercise of the option. It will also allow employees to acquire shares without having to pay tax on a discount of up to 15 per cent of the market price, with capital gains tax applicable on disposal of the share.

Noteworthy changes to the bill from the exposure draft published in January mean that recipients of the small start-up concession will also be able to benefit from the 50 per cent capital gains tax discount in a wider range of circumstances. 

Contributions from certain large venture capital investors will not rule out eligibility for the small start-up concession. The bill will now exclude eligible venture capital investments from the $50 million aggregated turnover test and grouping rules (when determining eligibility for the start-up concession) where the investment is made by venture capital limited partnerships, early stage venture capital limited partnerships, Australian venture capital funds or tax-exempt deductible gift recipients, such as universities.

The government has not responded to submissions calling for the extension of the start-up concessions to ASX-listed companies or for the cessation of employment to be removed as a deferred taxing point for unvested equity.