Back in 2009 the previous Government put certain divisions of the big accounting and law firms out of business, generally called “executive remuneration”.
But they need to get ready to go back to flogging their delayed tax income from 1 July 2015 as the new Government intends to reinstate one of their best ideas.
In addition the Government in going to give them another planning idea that is not just a deferral but so tax exempt income.
In a fact sheet titled “Improving taxation arrangements for employee share schemes” the Government has announced its plans for taxation of employee share schemes.
In summary, these will be the new rules from 1 July 2015…
No change for where employees receives shares (not options), except the “start-up” rules below. This means if my employer gives me $10,000 worth of shares and there is no risk of forfeiture I include the $10,000 as assessable income in the year I got the shares. When I sell the shares later my cost base is $10,000. If there is a real risk of forfeiture I delay including the amount in my assessable income until the risk is gone, 15 years (currently 7 but will go to go by 1 July 2015) or I leave the employment, whichever is earliest.
Big change for options to buy shares. The rules are the same as for shares in the paragraph above… Except… Even if there are no risks of forfeiture, the discount can be deferred to when the options are exercised. This has been done as some option schemes do not have forfeiture but you can’t exercise them for a series of years meaning you pay the tax before you can get any cash. My guess is the new rules will say if there is no risk of forfeiture and you give me options, the discount will not be assessable income until, 15 years, I leave the employment or I exercise the options and get my shares. Again the cost base of the shares will be the discount.
AND HERE IS OPPORTUNITY 1: if the employee does not need the income this year, replace it with share options and over the next 15 years, when marginal rates are lower, the employee can choose to exercise some options. It is like income averaging for farmers.
The third scenario is the new Start Up Scheme rules. These will be regularly used so get to know them. If i am an employee of a start up company and am issued shares at a discount 15% or less of their market value, the discount is not assessable income and my cost base is the market value of the shares. OPPORTUNITY 2: “Don’t pay me after tax bonus of $85,000 but rather issue me $100,000 if shares”. If you pull this off you just got $15,000 worth of shares tax free as I just paid 75% for my shares (i do have to hold them for three years… See below).
For options the deferral applies if the options are issue out-of-the-money (you can only buy shares at $5 but their current value is $4). You defer any tax until you sell the shares and your cost base assumes you paid market price for the out-of-the-money options.
These two Start Up options, shares or options, mean you effectively give your employees stuff tax free (a 15% discount on shares or out-of-the-money options)
BUT WHAT IS A START UP KEN! We don’t exactly know yet but Criteria will include turnover of not more than $50 million, being unlisted and being incorporated for less than 10 years. And if this is all I will be driving a personal services entity truck through these conditions (not employed be BHP but by my personal company…). And for this Start Up treatment to apply the shares or options need to be held for three years.
I should just say that the existing up-front tax concession, which exempts from income tax the first $1,000 of ESS interests given to an employee who earns less than $180,000 per annum, will also be retained.
So by 1 July 2015 there will be a couple of new ways to remunerate executives so they pay less tax or at least defer the tax… Let the advice begin!!!