Companies who provide their Australian based employees the opportunity to participate in an employee share scheme (ESS) have to meet mandatory reporting obligations to both those employees and to the Australian Taxation Office (ATO).
Importantly, companies only need to report where a taxing point occurred for at least one employee during the relevant financial year (in this case for the tax year ended 30 June 2016). In those circumstances, companies must report to their relevant employees by providing an ESS Statement by 14 July each year (so by 14 July 2016) and provide an ESS Annual Report to the ATO by 14 August each year (so by 14 August 2016).
The ATO has announced important changes to the way in which companies must report for 2016 tax year just completed and onwards.
When do companies need to report to their employees?
In general terms a company must report where at least one of its employees has a taxing event in relation to an ESS interest they have been given.
The focus on the taxing event is for the ATO to match data provided to them in the ESS Annual Report, with the information provided in individual employee tax returns. This makes it even more important for companies to communicate effectively with their employees about how ESS amounts have been calculated and will be reported to the ATO.
Unfortunately, however, as a result of changes made to the Australian ESS tax rules over the years there is not always a simple answer as to what must be reported and when, and the compliance burden for companies has increased as they need to properly understand when a taxing point occurs for their employees. Also, the taxing point may be as a result of something the employee does or something that occurs automatically (e.g. vesting dates, an employee leaving, employees exercise rights or selling rights/shares).
Companies need to remember that there are different Australian tax rules which apply for interests acquired pre-1 July 2009, post-1 July 2009 and post-30 June 2015, and again for interests granted under the start-up concessions which became effective on 1 July 2015. For a recap on what tax changes were introduced from 1 July 2015, see our earlier articles:
As a result, a company must give an ESS Statement to an employee by 14 July 2016 if:
- the employee acquired an interest at a discount under a taxed-upfront employee share scheme this financial year - i.e. there is a taxing event in the year the interest is acquired
- a deferred taxing point arose (or could have arisen) for the employee this financial year for an interest acquired under a tax-deferred employee share scheme
- a deferred taxing point arose for the employee this financial year because of a cessation time for shares and rights acquired before 1 July 2009, or
- the employee acquired shares or rights this financial year where the start-up concession applied.
In addition, where an ESS interest is provided to an 'associate' of the employee (rather than to the employee directly), then depending on the type of scheme and individual circumstances, the employee may nonetheless have to pay tax on that interest. In those circumstances, companies must provide a statement to their employee, rather than to the associate, in order to fulfil their reporting requirements.
What do companies need to report to their employees?
The information set out in the ESS Statement is used by the employee in completing their own Australian tax return.
No start-up concession applies
The information that must be contained in the ESS Statement includes the discount for each of those ESS interests acquired by the employee where there is a taxing event in that financial year.
When determining and reporting the discount at a deferred taxing point, importantly a company must take into account the '30 day rule' if the company is aware that the employee disposed of their ESS interest. The 30 day rule means that if an employee disposes of their ESS interest (or the share acquired on exercise of the right) within 30 days after a deferred taxing point, the deferred taxing point moves to become the date of that disposal. In some situations, the operation of this rule will move the deferred taxing point from one tax year into the next (and consequently change when reporting should occur).
Start-up concession applies
Where a company has provided an employee with an ESS interest where the start-up concession applier, then the ESS Statement to the employee must contain the following:
- the number of ESS interests acquired
- the market value of ESS interests acquired
- the acquisition price (for shares) or the exercise price (for options) of those ESS interests, and
- the acquisition date of the ESS interests.
What do companies need to report to the ATO?
The ESS Annual Report that companies must provide to the ATO by 14 August each year must contain the above information for each employee participating in an ESS and for each ESS that the employee is participating in. Find out more about it here.
What should multinationals do to meet their reporting requirements?
Normally it will be the company issuing the ESS interest who will report to employees and the ATO. However, for corporate groups headquartered outside of Australia and whose parent company is the provider of the ESS interest, an Australian subsidiary can assist the parent company by acting as their agent and reporting on their behalf.
This necessarily requires some planning, and in some cases internal group cooperation, to ensure that the reporting requirements are fully met, particularly in light on the changes to the way in which companies must report (referred to below).
What are the changes to the way companies must report to the ATO?
In past years most companies lodged their ESS Annual Report either through a paper or excel spreadsheet lodgement. Unfortunately the ATO has announced that it will no longer accept lodgements in either of these two formats and will require companies to either lodge using an online form or via software which meets the ATO's (rather specific) reporting requirements.
For Australian listed companies, usually their reporting obligations are met by their Australian based share registry. However, for multi-nationals and larger unlisted Australian companies, this change may be more problematic and time consuming.
What is the position for internationally mobile employees?
The ATO has also signalled a renewed focus on these employees by changing the way in which ESS interests to these employees must be reported.
Companies can choose whether to report discount amounts to these employees, either on a gross (unadjusted basis) basis or on an actual assessable basis (which would take into account any period of foreign service by the employee which may not be subject to Australian tax).
Companies may also optionally report to the ATO the start and finish dates of any employee assignment out of Australia, but may need to carefully consider whether they wish to do so.