Employee share schemes

Some companies encourage employees to participate in employee share schemes (ESS) by offering them discounted shares or rights (including options) to acquire shares. Employee share scheme income tax rules (ESS tax rules) apply to this discount.

In the 2009 Budget, the government announced changes to the income tax concessions previously available to participants in employee share schemes. The changes apply to shares and rights acquired under an ESS after 1 July 2009.

Taxpayers can no longer choose to have the discount on their shares and rights taxed either upfront or in the future. Discounts on shares and rights acquired under an ESS will generally be assessed in the income year in which the shares or rights are acquired.

Deferral of the tax liability is limited to schemes that meet the qualifying conditions for deferral under the earlier law and:

• that are based on salary sacrifice and offer no more than $5,000 worth of shares to an employee, or
• where shares or rights obtained are subject to a 'real risk of forfeiture'. (The test of 'real risk of forfeiture' is whether a reasonable person would conclude that there is a actual risk that the share or right will not be fully issued to an employee by a particular time and will be forfeited.)

Only employees with an adjusted taxable income of less than $180,000 now have access to the tax exemption of up to $1,000 of the total discounts.

CGT implications for employee shares and rights under a corporate restructure

If employee shares or rights are exchanged for replacement shares or rights in a new company under a corporate restructure that happened on or after 1 July 2004, a rollover may be available so that there is no taxing point under the ESS tax rules. Corporate restructures affected include mergers, demergers (in limited circumstances) and 100% takeovers. Any capital gain or capital loss made on the employee shares or rights because of the restructure will be disregarded where this rollover applies.

Changing residence or working in multiple countries

There are specific CGT rules relating to ESS shares or rights held by employees who become, or cease to be, Australian residents. There are also specific rules for temporary residents.