Some people are not aware that if they receive shares in a company for work they are doing (either as an employee or otherwise) that the receipt of these shares can be income on which tax is payable. I have noticed that this incorrect notion is more prevalent in the small business community. This is probably because the issuing of shares is a “paper” transaction that may not require any money to change hands. The value of the shares does not immediately show up in anyone’s bank account.
For many years the Australian taxation legislation has had specific provisions that deal with the taxation of shares, or rights to shares, whether those shares or rights have been received in an employment context or in the context of the provision of services. Normally benefits are taxed under the Australian fringe benefits tax law. Employee share schemes are an exception to that general rule.
Broadly, what the law tries to do is tax the “discount” on the issue of the shares or the rights. This means the difference (if any) between the market value of the shares or rights and what the recipient has to pay for those shares or rights. For example, a person receives 1,000 shares in his or her employer’s company and they have a market value of $5,000. The person pays $2,000 for these. The difference between these two amounts ($3,000) is assessable income, except if certain concessions apply. It should be noted that in this situation the person has not received any cash that could assist with funding the person’s tax bill on the income.
The rules in the Australian tax law that relate to the taxation of employee share schemes have been changed with effect from 1 July 2009. They have been completely re-written and there are some important changes to the way the law operates when compared to the former law. The new law is found in Division 83A of The Income Tax Assessment Act 1997. The law only applies to “ESS interests” issued by companies.
It is still the case, as a general statement, that the discount (referred to above) is subject to tax. However, the timing of when the discount will be taxed and the amount of the discount that can be taxed is determined by the type of employee share scheme. Depending on whether a number of conditions have been met, up to $1,000 of the discount can be exempt from tax in the hands of the employee. Also, the employer can get a tax deduction up to this amount in relation to each employee.
It is also possible for the taxing point to be deferred. Again, a number of conditions need to be met for this to be applicable. The employee share scheme rules discussed above do not apply if an “ESS interest” qualifies for deferred taxation. Further, the employer does not receive a tax deduction.
The policy behind the new provisions is that low and middle income earners should benefit from some tax concession if they are offered shares in their employer at a discount. If an employee’s adjusted taxable income exceeds $180,000, the tax exemption of up to $1,000 is not applicable. The new law says that one of its objectives is to increase the extent to which the interests of employees are aligned with those of their employers, by providing a tax concession to encourage lower and middle income earners to acquire shares under employee share schemes.
One of the problems for the Australian Taxation Office under the former law was knowing whether a person had received any benefits from an employee share scheme. Under the new law, employers will be required to report to the Commissioner of Taxation certain information to enable the Commissioner to ensure that the employee share scheme rules are being complied with.