Insight,

Taxing point on cessation of employment to be removed for new and existing ESS interests

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On 10 February 2022, the Corporate Collective Investment Vehicle Framework and Other Measures Bill 2021 (the Bill) was passed by the Federal Parliament. 

While the centrepiece of the Bill was the new “flow through” tax regime for the Corporate Collective Investment Vehicle, the Bill also contained a number of other measures including the welcome removal of the employee share scheme (ESS) deferred taxing point on cessation of employment.  The Bill was initially introduced into Parliament on 25 November 2021, however was referred to the Senate Standing Committee on Economics (the Committee).  The Committee released its report on 3 February 2022, recommending that the Bill be passed as soon as practicable.

The removal of the cessation of employment deferred taxing point will apply to all ESS interests (new and existing) that are subject to deferred taxation, provided that the ESS deferred taxing point occurs on or after 1 July of the financial year in which the Bill receives Royal Assent (the Start Date).  The Start Date will now occur on 1 July 2022.

The application of the amendments to existing ESS interests is a positive change to the Exposure Draft legislation released on 29 July 2021, which provided that the removal of the cessation of employment ESS deferred taxing point would apply only to new ESS interests granted on or after the Start Date.

Summary

In the 2021-22 Budget, the Federal Government announced changes to regulatory and tax arrangements for employee share schemes.  The proposed tax reform was to remove the taxing point that occurred on cessation of employment in respect of ESS interest that were subject to deferred taxation.

The cessation of employment taxing point has been widely regarded within the industry as problematic, particularly where an employee may be restricted from disposing of their shares or rights at the time they cease employment and, accordingly, may have trouble funding the tax liability that arose on cessation.

On 29 July 2021 Treasury released Exposure Draft legislation of the proposed regulatory and tax amendments for consultation.  The consultation process concluded on 25 August 2021.  While the regulatory amendments have not yet been introduced into Parliament, Schedule 10 to the Bill removes cessation of employment as a taxing point for ESS interests which are subject to deferred taxation.

Under the Bill, where an employee ceases the relevant employment in respect of which the ESS interest was granted, their deferred taxation arrangement will continue and the earlier of the remaining ESS deferred taxation points will apply.

In a departure from the Exposure Draft legislation, the transitional provisions in the Bill provide that the removal of the ESS deferred taxing point on cessation of employment will apply not only to new ESS interests granted after the Start Date, but also to existing ESS interests that have not yet had an ESS deferred taxing point prior to the Start Date.

Key takeaways

It is recommended that companies consider the following:

  • Whether any revised taxation summary or further disclosure should be made to holders of relevant deferred ESS interests, given the removal of the cessation of employment deferred taxing point will apply to existing ESS interests that have not yet had an ESS deferred taxing point prior to the Start Date (being 1 July 2022).
  • Undertaking a review of their existing or proposed employee share plan terms and consider whether design changes are appropriate.  This is particularly the case if existing plan terms provide for accelerated vesting of rights and/or the ending of restriction periods for shares on cessation of employment.

Please contact a member of the KWM Tax Team if you would like more details regarding the implications of the amendments or assistance in reviewing your employee share plan arrangements.

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