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    3. 2015
    4. Valuing Employee Share Schemes (ESS) – Impending Tax Changes

    Valuing Employee Share Schemes (ESS) – impending tax changes

    19 Feb 2015

    2015

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    • Valuing Employee Share Schemes (ESS) – Impending Tax Changes
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    • Tax alert: Changes to Employee Share Scheme Tax Laws

    The valuation and appropriate treatment of entitlements in Employee Share Schemes (“ESS Interests”) is a frequent issue in the determination of financial matters on relationship breakdown but causes significant complexities.

    Part of that complexity is the prospective tax treatment of ESS Interests – which is compounded in circumstances where those entitlements are deferred or may never crystallise.

    Legislation affecting the taxation of ESS Interests – [Division 83A of the Income Tax Assessment Act 1997] - has recently been passed by Parliament and is awaiting Royal Assent.

    Providing certain conditions are met, the following proposed changes will impact the taxation of ESS plans for all companies: 

    • The ESS taxing point for ESS rights that are eligible for deferred taxation will usually be when they are exercised (rather than on vesting as is currently).
    • The maximum deferral period for the taxation of ESS Interests will be extended to 15 years (from 7 years currently).
    • Tax paid on ESS rights that are never exercised and expire and lapse will be refundable through a tax return amendment. Under the current ESS rules, lapsed options would often give rise to a capital loss.
    • New approved market valuation methodologies to reflect market conditions ('Safe harbour' valuation methods) are being introduced. This will assist in valuing unlisted shares.
    • The level of share ownership or voting rights which an employee can have and still be eligible for a tax deferral on ESS Interests is being doubled from 5% to 10% (with certain modification of the rules in this area).

    In addition, there will be significant concessional tax treatment of ‘eligible’ ESS Interests provided qualifying ‘start-ups’, being companies (including their related entities) that are:

    1. Unlisted;
    2. Incorporated for less than 10 years; and
    3. Have aggregated turnover less than $50m.

    These changes need to be considered when valuing ESS Rights that are issued after 1 July 2015.

    If you would like further information, please contact the Family Law Consulting team at Grant Thornton. 

    Grant Thornton is working with the Family Law Section to present a webinar for members on the valuation challenges of employee share schemes and related taxation implications - look out for details in the coming weeks.

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