Employee share schemes under the microscope for “complicated and restrictive” regime

Source: Unsplash/Leon.

A Standing Committee report has recommended significant changes to the way employee share schemes are taxed, including upping the value of shares available each month, and making employees liable for taxation only after selling their shares.

The House of Representatives Standing Committee on Tax and Revenues tabled its report on tax treatment of employee share schemes on Monday, finding the current regime to be “complicated and restrictive”.

The report, Owning a Share of Your Work: Tax Treatment of Employee Share Schemes, lays out 18 recommendations.

The overarching recommendation is that employee shares should be treated as capital, for the purposes of taxation. That means recipients would become liable for taxation only when they sell those shares, via the current capital gains tax regime.

Other suggestions, intended to make employee share schemes more accessible to more businesses and employees, include the removal of a 15% cap on discounted share value; a reduction in disclosure requirements in some situations; and an increase on the value of share an employee can receive each month without tax liability.

Employees can currently receive up to the value of $1,000 in shares per month, without paying income tax. The committee suggested increasing this to $50,000.

The report also calls for an investigation from the Productivity Commission, looking into how existing arrangements can be improved by taking inspiration from other regions.

It also suggests the ATO should collect and publish data on ESS use, launch a public awareness campaign, and simplify its own ESS documentation to no more than two pages.

“Employee Share Schemes matter because they support new businesses, innovation and startups, which are the engine of higher productivity in our country,” Committee chair and Liberal MP Jason Falinski said in a statement.

“Higher productivity leads to sustainably higher wages, better products and services, greater competition and more choice. All these outcomes directly impact on the quality of life that hard working Australians enjoy.

“Productivity is what makes life better, more affordable and easier.”

Measures to reform the employee share scheme rules were first announced in 2018, when Treasurer Josh Frydenberg and then minister for small and family business Michaelia Cash suggested, in a joint statement, that the “complex and fragmented” framework was discouraging businesses from running them.

More information around the reforms were announced in the 2021 federal budget, with the government promising to ‘reduce red tape’. At that time, the value of shares an unlisted business was able to offer employees per year was increased from $5,000 to $30,000.

The draft legislation for those changes were revealed earlier this month, and the consultation is still open for submissions until August 25, 2021.

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Chris Davey
Chris Davey
30 days ago

How is the increase to $50k per month relevant for the great majority of startups? This seems like it would be used for executives of well established companies to effectively halve the tax they pay on ESS’s due to the CGT discount.  

All other points mentioned appear to make perfect sense.