The Government has introduced into Parliament the Tax Laws Amendment (2009 Budget Measures No. 2) Bill 2009 and the Income Tax (TFN Withholding Tax (ESS)) Bill 2009 to reform the taxation of employee share schemes.(Background here)

When passed, the legislation (which will apply from 1 July 2009) will assess all discounts on shares and rights provided under an employee share scheme in the income year in which the shares and rights are acquired

Changes since the exposure draft include:

• widening the exposure draft refund provisions to ensure that a refund will not be denied when employee share scheme benefits are forfeited as a result of leaving employment;
• including additional guidance and examples of the real risk of forfeiture test, including when forfeiture conditions relating to retirement would constitute a real risk;
• providing transitional arrangements for shares and rights acquired before 1 July 2009;
• adjusting the exposure draft provisions related to salary sacrifice arrangements to make it administratively easier to offer complex schemes involving both shares or rights with a real risk of forfeiture, and salary sacrifice arrangements;
• exempting employee share trusts from capital gains tax over shares acquired to satisfy the exercise of rights provided under an employee share scheme; and
• amending certain tests in the exposure draft package, such as the tests requiring schemes to be offered to a broad cross-section of employees, to make the rules easier to comply with.

Tax on employee share scheme benefits cannot be deferred beyond the time when an employee ceases employment with their employer.

The Assistant Treasurer has previously asked the Board of Taxation to consider two further issues raised in consultation:

• how to best determine the market value of employee share scheme benefits; and
• whether shares and rights under an employee share scheme at a start-up, R&D or speculative focused company should have separate tax deferral arrangements, despite not being subject to a real risk of forfeiture.

The Board of Taxation will report their findings in relation to these issues to the Government by February next year.