One less brick in the wall
Tax on ESS interests on ceasing employment to be removed
With application to securities granted on or after 1 July 2022, the triggering of a tax liability on Employee Share Scheme interests when employees cease their employment will be removed (subject to passing of draft Legislation currently released for consultation).
This very positive change will mean that the need to early vest or early release securities from restriction will no longer be necessary. This change will have an impact on employee share schemes/incentive plans for all Australian companies (even if just by removing the complications of having to rely on the indeterminate right provisions of the Tax Act to get a similar outcome).
What does this mean?
For ESS interests granted after that date, their deferred taxing points will be the earlier of:
· the date those securities are no longer subject to either real risk of forfeiture and/or genuine restriction from trading; and
· 15 years from their grant.
This means participants will no longer automatically incur a tax liability on the value of ESS interests when they cease employment, notwithstanding the securities may be subject to an ongoing performance/restriction period under an incentive plan.
It also removes the complication of using the ‘indeterminate right’ concept in the Tax Act (which can be availed of if the ESS interest is a right and can be cash settled on vesting/end of restriction), which requires a participant to go back and amend the tax return of the year that they ceased employment to include the market value back at that time of any ESS interests that ultimately vest. Sound complicated? It is.
What do you need to do?
This change should mean much easier administration of incentive plans for companies that want ESS interests of “good leavers” to continue subject to the same vesting or restriction conditions as ongoing employees.
What should you do:
Diarise 1 July 2022 as the expected effective date of this change.
Consider whether your Board/Remuneration Committee might wish to rethink its existing policies for how securities are treated where participants cease employment during a performance/restriction period, particularly where these have been structured with participants’ tax obligations in mind.
Determine whether any of your company’s plan rules or offer documentation will need updating next year, particularly tax summaries you provide to participants.
Let us know if you would like to discuss the implications of this change for your company’s employee incentive plans.