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The Government has now entered a bill into parliament to give effect to proposals to reduce tax payable on “employee share schemes” (ESS’s) starting on 1 July 2015.
With growth back on the agenda for so many businesses, this legislation is great news! For many of the businesses looking for growth, they know that both employee engagement and incentivisation are vital to achieving the overall enterprise goals.
The aim of these changes is to improve the concessions available for both the businesses and employees. They also aim to allow some further concessions to start-ups and companies in the innovation space so they can compete as an employer with foreign start-ups.
What’s an ESS?
ESS’s can be an effective way of rewarding performance and increasing motivation in team. In addition to wages, employees may receive shares in the company which entitles them to future dividends and a share of the potential growth in the business.
What are the existing tax concessions?
To make an ESS attractive, shares are issued at a discount to market value.
Without any tax concessions, this discount would be taxed to the employee up-front at their normal individual income tax rate [currently the maximum is 49% with the medicare levy and budget repair levy].
For example, if you are issued $10,000 worth of shares for $1,000 then the employee will have to pay tax on the discount of $9,000. In some cases the payment of tax on the $9,000 can be deferred until a future event occurred. For example, ceasing employment.
The concessions currently allow up to $1,000 of the discount to be received tax free [depending on your level of income], and the point at which you pay tax on the discount can be deferred.
Expanding the existing concessions
From 1 July 2015, it is proposed to expand the tax concessions in the following manner:
These are all great signs for small to medium enterprises who often baulk at the set-up costs of an ESS - let alone the complexity involved.
A new concession is also being aimed at the entrepreneurial spirits out there [including start-up companies].
Under the proposed legislation, provided the discount on market value is less than 15%, the entire discount will be tax-free.
To be eligible:
Where to from here
The new measures are expected to be legislated soon. Hopefully this will mean an upswing in the use of equity to incentivise employees and drive growth in both new and existing businesses. This is something that will not only benefit individuals from a tax perspective but is a massive opportunity for those businesses focusing on being a lean start-up and really involving the team in the business journey.
Watch this space for details of the final measures.
For information on the press release click here http://bfb.ministers.treasury.gov.au/media-release/032-2015/