(Part 2 securities acquired post 2009 financial year)

Following the e-alert published last week, this article will consider the potential tax implications if you acquired securities under an employee share scheme on or after 1 July 2009.  Due to amendments to the tax legislation governing employee share schemes, one of the main changes to the tax consequences is the categorisation of four distinctly different types of employee share schemes. Consequently, the tax consequences will depend on the type of scheme the employee is participating in and whether the particular scheme meets certain requisite conditions, rather than requiring the employee to make an election by a certain date.

The four schemes are as follows:

1.  Taxed-upfront scheme (ineligible for reduction)
2.  Taxed-upfront scheme (eligible for $1,000 reduction)
3.  Tax-deferred scheme – salary sacrifice
4.  Tax-deferred scheme – real risk of forfeiture

1.  Taxed-upfront scheme (ineligible for reduction)

This scheme refers to securities acquired under an employee share scheme that does not meet the conditions to allow for tax-deferral or the $1,000 reduction. Therefore as the name suggests, you will be assessed on the total discount you received on the securities in the financial year that they were acquired.

2.  Taxed up-front scheme (eligible for $1,000 reduction)

To be eligible for the $1,000 reduction, the employee share scheme under which your securities are acquired must meet certain basic conditions, and you will now need to satisfy an income test to qualify. Providing these conditions are met, you will be able to reduce the discount to be included in your taxable income by up to $1,000. The balance of the discount you received is then added to your taxable income in the financial year the securities were acquired.

3.  Tax-deferred scheme  – salary sacrifice

In addition to satisfying the basic conditions, additional conditions relating to the securities; their value; how they are offered and to whom the employer has offered them need to be satisfied for securities acquired under an employee share scheme to qualify as a tax-deferred – salary sacrifice scheme. Additionally, you must receive the securities under a salary-sacrifice arrangement and the value cannot exceed $5,000 a year.

Provided these conditions are met, the employee share scheme interests will be taxed in the income year that a “deferred taxing point” occurs. The deferred taxing point is triggered by different events depending on whether the securities held are shares or rights, but in both instances this is capped at 7 years. The deferred taxing point will generally be triggered if your employment ceases and there are no restrictions on the disposal of your security interests.

4.  Tax-deferred scheme  – real risk of forfeiture

As with the tax-deferred salary sacrifice scheme, this scheme must meet the same basic conditions but rather than being offered under a salary-sacrifice arrangement, there is a requirement that any rights acquired must be subject to a “real risk of forfeiture”.

A real risk of forfeiture is what a reasonable person would consider to be a real risk that the employee may forfeit or lose their security interest, but does not include the situation where an employee deliberately takes no action to realise their interest. Determining whether a real risk of forfeiture exists will depend on the circumstances surrounding each scheme and your individual circumstances as an employee. Examples may include situations where the employee retaining the interest is contingent and subject to meeting certain performance goals or a minimum term of employment.

Once these conditions are met, the employee share scheme interests will be taxed in the income year that a deferred taxing point occurs. An additional trigger is the lapsing of the real risk of forfeiture.

It will be the employer’s responsibility to advise you of whether the employee share scheme offered meet the requisite conditions to be classified as a taxed-upfront or tax-deferred scheme. There is no longer a requirement or opportunity for the employee to make an election as to how their interests will be taxed, as this will be determined by the classification of the scheme entered into.

However, you should ensure that you give your employer a tax file number declaration to avoid further withholding tax consequences which is levied at the highest individual tax rate. Here at The Quinn Group, our dedicated team of experienced Tax Agents, Tax Lawyers and Tax Accountants are able to assist you with all your Tax related queries. Complete and submit our online enquiry form or call us on 1300 QUINNS (1300 784 667) +61 2 9223 9166 to arrange an appointment.