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12 May 20213 minute read

Australia – reforms to Employee Share Scheme rules

Australia’s COVID-19 “comeback” 2021-22 Federal Budget (Budget) was delivered by the Australian Treasurer, the Hon Josh Frydenberg, on 11 May 2021 and provides, amongst other things, changes to the tax treatment of Employee Share Schemes (ESS).

Good leaver taxation

  • Generally the ESS rules tax individuals when they receive their shares/options, or allow a deferral of tax to a certain point under specific circumstances.
  • The current position for employees who leave employment and are allowed to keep their unvested awards (i.e. “good leaver” treatment) is that their leaving date becomes the tax point on those awards. That is, the deferral of tax applies until the employee ceases employment and the employee is taxed at that time (and on the value of the shares).
  • The problem is that leavers may not have the means to pay the tax unless, as often happens, the company is willing to accelerate vesting of their awards to their last date of employment and/or they have no choice but to exercise their options on that date. Provided there is a market for the shares, either approach would allow the leaver to sell some of their shares to fund the tax.
  • This has also caused a number of issues of concern for companies when setting up plans for employees in Australia. In particular, this cessation point was largely inconsistent with the operation of employee share plan tax rules globally, and therefore, it created an inability to implement consistent employee share plans and consistent treatments as between employees in Australia and the rest of the world. In extreme circumstances, this difference required separate plans to be written for a company’s global workforce, and their Australian employees (increasing cost and complexity for companies).
  • The Budget has now confirmed that a cessation of employment will no longer be a tax trigger under the ESS rules.
  • Provided the Budget receives Royal Assent, cessation of employment will not be the tax point for any awards granted on or after 1 July 2021.

The deletion of the cessation of employment as a tax trigger is a welcome change to the ESS rules, which should enable consistency as between plans applicable to (and tax treatment for) employees of a global organisation in different jurisdictions. Overall, the changes are designed to further improve the ability for Australian companies to recruit and retain talented employees.

If you would like to discuss any of this our team is at your disposal.