The Crest of the Commonwealth of Australia Treasury Portfolio Ministers
Picture of Wayne Swan

Wayne Swan

Deputy Prime Minister and Treasurer

3 December 2007 - 27 June 2013

13 May 2008

NO.044

Employee Share Schemes

As part of its commitment to ensuring the tax system is as fair and efficient as possible, the Government will make two legislative changes to the taxation treatment of shares or rights acquired under an employee share scheme (ESS).

The first change is to the election requirements to access one of two tax concessions available to taxpayers who acquire qualifying shares or rights under an ESS. This change will improve the integrity of the law by ensuring taxpayers appropriately report income in their tax returns.

The second change is to remove double taxation that arises in relation to certain ESS that use an employee share trust. This change will improve flexibility in the manner shares or rights can be provided to employees under an ESS.

Australian taxpayers are entitled to a tax system that is as fair and efficient as possible and this measure will help achieve that goal. The change to the election requirements will result in a gain to revenue in the order of $77 million over the forward estimates. The measure is another demonstration of the Government's commitment to finding savings in the Budget to help tackle inflationary pressures. The change to remove double taxation will have a nil impact on revenue.

Further detail on the changes is contained in the Attachments.

13 May 2008

 


 

ATTACHMENT A
Employee Share Schemes - Election Requirements

Currently, the Tax Act allows taxpayers to choose between two tax concessions available in relation to shares or rights acquired under a qualifying ESS:

  • a tax-upfront concession where a taxpayer is only assessed on any discount provided by an employer on the shares or rights in the income year the shares or rights are acquired that is in excess of $1,000; or
  • a tax-deferred concession where a taxpayer can defer taxation which generally is the earlier of 10 years or when any restrictions or conditions placed on the shares or rights are lifted.

Under the current election requirements, a taxpayer should complete a written election before lodgement of their income tax return for the year in which the shares or rights are acquired. The written election is not required to be provided to the Commissioner of Taxation.

The choice of concession is intended to be final. However, some taxpayers have sought to change their choice in a later income year by claiming that an election to be taxed on grant was made. In this manner, depending on market conditions, they can reduce their tax liability.

The election procedures will be changed, so that a taxpayer who wishes to make an election to be assessed under the taxed-upfront concession, must include the value of the discount in the taxpayer's income tax return for the year of income the shares or rights are acquired (where it exceeds the $1,000 exemption amount available under the taxed-upfront concession). If a taxpayer does not include an amount in their income tax return in the year the shares or rights are acquired, then they will be taken to have chosen to be taxed under the tax-deferred option.

The change will improve the integrity of the taxation system by removing the ability for taxpayers to manipulate the taxing point and ensure that discounts provided on shares on rights under an ESS are properly included in their assessable income.

The measure will take effect with respect to shares and rights acquired from 1 July 2008.

 


 

ATTACHMENT B
Employee Share Schemes - Prevention of Double Taxation

The measure will remove double taxation that currently arises with certain employee share schemes (ESS) that involve the use of employee share trusts.

Double taxation will be removed by providing the trustee (or beneficiary) of the employee share trust with capital gains tax (CGT) relief when an employee, on the exercise of rights, becomes absolutely entitled to the shares held in the trust.

The changes will take effect in relation to CGT events occurring from 7.30 pm (AEST) on 13 May 2008.