ATO ruling provides clarity for businesses on employee share schemes

Executives can now defer the tax payable on their shares and options provided through corporate schemes after they have completed one year of service, new rulings from the Australian Taxation Office have outlined.

It comes after months of controversy around the area of employee share schemes, sparked by changes announced in the Budget last May which said workers earning over $180,000 would need to pay tax up front on shares given to them by their employer.

The new ruling, which was published late last week, states that employees can defer the tax on shares under certain conditions.

The ruling dictates that employees can defer any tax associated with shares or options provided by an employee for up to seven years, but only if there is a risk they could lose those shares for one year.

Additionally, employees can also defer tax for three years as long as there is a risk of losing those shares or options for at least six months after they have been initially granted.

“A condition imposing a minimum employment period of 12 months is considered to give rise to more than a ‘mere’ or ‘rare’ possibility of forfeiture and to be a condition genuinely directed to retaining employees and aligning their interests with the interest of the company,” it states.

The ruling is based around the idea that for an employee to defer the tax on shares given through a company, there must be a real risk that an employee could lose their job, and subsequently, the shares or options.

Frank Drenth, executive director of the Corporate Tax Association, says the ruling provides some clarity and will allow businesses to create or reinstate their own employee share schemes.

“This is where the Tax Office is essentially putting down some safe harbours around the question of share schemes. It is essentially saying if there is no risk of an employee forfeiting their shares, then they should be taxed at the grant time.”

“But the ruling also states that if you get a plan saying if you take up shares in three years, that’s a risk because you could lease or your job or whatever, before then, so that’s therefore allowing the tax to be deferred.”

Drenth says while there has been a huge amount of controversy surrounding the changes to employee share schemes, he believes more rulings from the ATO will help businesses, many of which cancelled their schemes following last year’s budget, to become more certain about their own policies.

“The ATO rulings may not always have the right answer for everyone but they have laid down some markers and they will help people structure their own schemes.”

“Besides, I don’t think it is unreasonable at all to leave some elements of the legislation slightly uncertain and then have the ATO fill in some of the gaps and define where people stand. I don’t see any problem with that at all.”

The Government is currently studying a report from the Board of Taxation which reportedly recommends separate measures for small business introducing share schemes, which are often given by start ups to employees in lieu of a higher salary.