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.