A tax-deferred scheme allows an employee to defer paying tax in relation to their employee share schemes (ESS) interests until the income year in which the deferred taxing point occurs, instead of paying tax in the year the interests are acquired. To be able to defer tax, both the scheme and the employee must meet the general conditions as well as the specific conditions for each type of tax-deferred scheme.
Deferred taxing point
If you give employees ESS interests under a tax-deferred scheme, they will be assessed in the year that the deferred taxing point occurs. The amount assessed will be the market value of the ESS interests at the deferred taxing point, reduced by the cost base.
Shares
The deferred taxing point for a share or stapled security is the earliest of the following:
- when there is no real risk of forfeiture and the scheme no longer genuinely restricts disposal of the share
- when your employee ceases the employment in respect of which they acquired the share (employment ceasing on or after 1 July 2022 will no longer be a deferred taxing point)
- 15 years after your employee acquired the share (or seven years for ESS interests acquired before 1 July 2015).
Rights
The deferred taxing point for a right is the earliest of the following:
- when there is no real risk of forfeiting the right and the scheme no longer genuinely restricts disposal of the right
- when your employee ceases the employment in respect of which they acquired the right (employment ceasing on or after 1 July 2022 will no longer be a deferred taxing point)
- for ESS interests acquired after 30 June 2015
- when your employee exercises the right, there is no real risk of forfeiting the resulting share and the scheme no longer genuinely restricts disposal of that share
- 15 years after your employee acquired the right
- for ESS interests acquired before 1 July 2015
- when there is no real risk of forfeiting the right or underlying share, and the scheme no longer genuinely restricts exercise of the right or disposal of the resulting share
- 7 years after your employee acquired the right.
30-day rule – it can change the deferred taxing point
If your employee disposes of their ESS interest (or the share acquired on exercise of the right) within 30 days after the deferred taxing point, the deferred taxing point becomes the date of that disposal (this is called the 30-day rule).
For example, a deferred taxing point arises on 10 March 2016 and the employee disposes of the ESS interest on 29 March 2016. Due to the sale being within 30 days, the deferred taxing point is now 29 March 2016.
You must take account of the 30-day rule when you are aware of a disposal.
In some situations, this means that the 30-day rule will move the deferred taxing point from one income year into the next. In that case, when fulfilling reporting obligations:
- if you become aware of the disposal before issuing the ESS statement to your employee for the earlier year, you must update the ESS statement for the earlier year so that it does not show a discount for those ESS interests in that year (but include the discount on the ESS statement for the later year)
- if you become aware of the disposal after issuing the ESS statement to your employee for the earlier year, you must give an amended ESS statement to your employee to remove the discount for those ESS interests in that earlier year, and you will need to show the discount in the ESS statement for the later year
- if you have already sent the ESS annual report to us, you will need to amend that report for the earlier year, to ensure that we and your employee have the same information.
For more information about the 30 day rule, see Employer reporting requirements for employee share schemes.
Salary sacrifice (tax-deferred scheme)
Employees who have acquired ESS interests under salary-sacrifice arrangements are taxed in the income year the deferred taxing point occurs.
In addition to the general conditions the ESS and employee must meet, the following specific conditions must also be met:
- the ESS interests are shares (or stapled securities) that are acquired under a salary-sacrifice arrangement with you (their employer) or your holding company
- when you provide the shares (or stapled securities), the discount must equal the market value of the shares (or stapled securities)
- the rules governing the scheme (or the offer documentation) must expressly state that the deferred tax arrangement applies to the scheme
- at least 75% of your Australian-resident permanent employees with at least 3 years' service are, or have been, entitled to acquire ESS interests in your company or your holding company under an ESS
- any rights acquired under the scheme must be subject to a real risk of forfeiture.
For the tax to be deferred, your employee must not receive more than $5,000 worth of shares (or stapled securities) during the year under salary-sacrifice arrangements from you (their employer) or your holding company.
Real risk of forfeiture (tax-deferred scheme)
Some schemes include a risk that the employee's ESS interests will be forfeited.
Employees who have acquired ESS interests under such a scheme are taxed in the income year that the deferred taxing point occurs, provided both they and the scheme meet the general conditions, and the following specific conditions:
- your employee must have a real risk of forfeiting their ESS interests under the conditions of the scheme
- if the ESS interests are shares, at least 75% of your Australian-resident permanent employees with at least 3 years' service are, or have been, entitled to acquire ESS interests in you or your holding company under an ESS.
Disposal restrictions (tax-deferred schemes)
From 1 July 2015, some schemes that genuinely restrict disposal of ESS interests that are rights are treated as tax-deferred schemes.
Employees who acquire rights under these schemes are taxed in the income year in which the deferred taxing point occurs, if they and the scheme meet the general conditions and both:
- the scheme rules restrict immediate disposal of the ESS interest (that is, employees are not permitted to dispose of rights as soon as they acquire them)
- the offer documentation or the scheme rules state specifically that the scheme is a tax-deferred scheme.