Written by Andrew Clements and Tim Wells
On 23 August 2021 the House of Representatives Standing Committee on Tax and Revenue (Committee) released its report titled 'Owning a Share of Your Work: Tax Treatment of Employee Share Schemes' (Report).
The Report contains comprehensive and common sense recommendations to promote employee ownership in Australia. Importantly, the recommendations deal with not only technical modifications but also the expansion of the scope of the employee share schemes (ESS) regime. It also recognises the importance of an expanded role of the Australian Tax Office (ATO) and Productivity Commission in the promotion of forms of employee ownership.
King & Wood Mallesons (KWM) strongly supports the Committee's recommendations. We are pleased to see that many of the recommendations that we identified in our submissions to the Committee have been included in the Report.
We are excited by the specific recommendation for the Productivity Commission to examine how the use of employee ownership trusts of the kind used in the UK can be expanded in Australia.
KWM looks forward to continuing to further develop the promotion of employee ownership in Australia.
The Report makes the following recommendations regarding ESS in Australia:
Reform of existing rules:
- Align the tax deferral conditions for shares and rights: removing the real risk of forfeiture requirement for shares and removing the 75 per cent offer requirement for shares.
- Increase the threshold for tax exempt plans: increasing the $1,000 limit in section 83A-35(2)(a) of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) to $5,000.
- Simpler valuation rules for unlisted companies: extending the definition of 'safe harbour' valuation contained in Legislative Instrument – Income Tax Assessment (ESS 2015/1) to all unlisted
- Changes to start up regime:
- removing the requirement for a maximum 15 per cent discount for shares under the start-up regime;
- extending the 'start up' definition to listed companies that otherwise fulfil the criteria to be considered a 'start up'; and
- removing the aggregated turnover test to relate to wholly owned groups or entities that can be shown to be controlled by the entity as per the definitions of control under the Corporations Act 2001 (Cth).
- Support the use of UK style employee ownership trusts in Australia: the Productivity Commission should investigate how the use of employee ownership trusts can be facilitated and encouraged.
- Support announced reform of cessation of employment taxing point and reform of corporate regulation of employee share scheme offers:
- The Treasurer announced in the 2021-22 Federal Budget that the cessation of employment taxing point will be removed and corporate regulatory relief will be provided to ESS issuers. The Government has since released exposure draft legislation which proposes to make these amendments. See our previous alert for further detail.
Increase the level of assistance provided to businesses to establish ESS:
- Increase the role of the ATO to include:
- obtaining and publishing up-to-date data on ESS use;
- establishing a public awareness program to inform current and potential business owners of the existence and benefits of ESS, and where and how to access the available resources;
- establishing a 'one stop shop' approach to ESS, including documentation, processes and Australian Securities and Investments Commission reliefs to enable start-ups in particular to find all they need in one place, combined with a help line to answer specific questions; and
- expanding ATO model documents to include documents similar to those produced by the UK Department for Business Innovation and Skills. This may include model documents relating to employee ownership trusts of the kind that are implemented in the UK.
- Streamline the ATO's administrative approach to ESS by:
- simplifying its documentation to no more than two pages;
- re-instating the option for lodgement of the ESS annual report in a spreadsheet format;
- clarifying whether sections 109F(4) and 245-35(a) of the ITAA 1997 and the ATO Interpretive Decision Fringe Benefits Tax (2003/317) mean that Fringe Benefits Tax is not in fact payable for discharged ESS loans; and
- including in its examples of 'merely incidental' activities in Taxation Determination Income Tax: what is an 'Employee share trust' (2019/13), actions that are taken in common corporate transactions such as rights issues, demergers and other capital raising transactions.
Greater review of opportunities and impact of legislative change:
- Changes that are made to legislation as a result of the Committee's inquiry or Treasury's 2019 review should be reviewed by the Productivity Commission 5 years after the commencement date of the changes.
- The Productivity Commission should explore the structure of ESS and their related taxation treatment in other countries and whether these approaches could be adapted to the Australian taxation system to support productivity and innovation.
Please do not hesitate to contact a member of the KWM team if you would like further information regarding the Report.
 The recommendation in the paragraph 3.81 indicates that the recommendation is to increase the tax exempt amount to $50,000 in order to match the current salary sacrifice limit. The current salary sacrifice limit is in fact $5,000 per person. We are seeking clarification of this amount with the Committee.