Tax Law Update – Tax Bill contains new regime for employee share schemes

Home Insights Tax Law Update – Tax Bill contains new regime for employee share schemes

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Contributed by: Shaun Connolly

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Published on: June 26, 2017



A Bill has been introduced to Parliament proposing significant changes to the tax treatment of employee share schemes. The main change is in relation to share schemes involving a "day one" acquisition of shares, with retention of the shares being subject to agreed vesting conditions. Under current laws it is the value of the shares on "day one" (less cost to the participating employee) which is subject to tax. The change proposed is that any value increase between acquisition of the shares and satisfaction of the vesting conditions will become taxable (which is not the case under current law).

Summary of proposed changes

Taxing point for employees: The most substantive change is to defer the point in time at which the value of the benefit to an employee under a share scheme is measured and therefore subject to tax. Instead of being the date on which the employee acquires the shares (as is the case under current law), the proposed "share scheme taxing date" will be the date on which the employee holds the shares:

  • free of any conditions that could allow or require the transfer of the shares other than for their market value (eg if certain performance hurdles are not met);
  • free of any features that provide protection to the employee from a decline in value in the shares; and
  • without the prospect that the terms of the shares will change in a way that affects their value (eg shares issued with limited rights but that convert into ordinary shares on the occurrence of defined events).

The intention of the new rule is that the shares are valued, and any difference between that value and the amount paid by the employee is subject to tax, at the time the employee holds the shares in the same way as other ordinary shareholders. This means any increase in value between the date the shares are acquired by the employee and the date that any scheme conditions are satisfied (often referred to as the "vesting date") will be subject to tax.

Employer deduction: To achieve a symmetrical tax outcome, the employer company will be entitled to a deduction for an amount equal to the amount of income derived by the employee. Note that this amount will often bear no resemblance to the actual cost to the employer of providing the benefit.

Grandfathering of existing schemes: The Bill proposes that existing schemes will be grandfathered where:

  • shares were granted or acquired before 12 May 2016 (being the date of the Issues Paper); or
  • shares are granted or acquired within six months of enactment of the new rules provided that the "vesting date" is before 1 April 2022 and the shares were not granted or acquired for a purpose of avoiding the application of the new rules.

Widely-offered, low value share schemes

The Bill also proposes changes to the current concessionary regime for low value share schemes made available by some employers to all of their employees (often referred to as "DC 12 schemes").

Pleasingly, the monetary thresholds and other eligibility criteria for such schemes are being updated and simplified. However, the Bill proposes that (with effect from 6 April 2017, being the date the Bill was introduced) employers will no longer be entitled to a deduction for the cost of providing the shares or the deemed deduction currently available where a loan is made to an employee as part of the scheme (administrative and management costs will still be deductible). So, although the benefit to the employee will still be exempt from tax, the absence of a deduction to the employer means the scheme will no longer be concessionary on an overall basis.

This publication is intended only to provide a summary of the subject covered. It does not purport to be comprehensive or to provide legal advice. No person should act in reliance on any statement contained in this publication without first obtaining specific professional advice. If you require any advice or further information on the subject matter of this newsletter, please contact the partner/solicitor in the firm who normally advises you, or alternatively contact one of the partners listed below.

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