The Assistant Treasurer, Senator Nick Sherry, has released a
Policy Statement setting out the final taxation treatment of shares and rights acquired under employee share schemes, effective from 1 July 2009.

Under the arrangements outlined on
Budget night in May, all discounts on shares and rights provided under an
employee share scheme would be assessed in the income year in which the
shares and rights are acquired.

Under the final framework for employee
share schemes, the taxation of discounts on shares and rights acquired
under an employee share scheme will remain the starting principle of
the regime, with concessional treatment available for particular
schemes.

The upfront tax exemption will be means tested
and tax deferral will only be accessible where there is a real risk
that the shares or rights may be forfeited, such as due to performance
hurdles or employment conditions. The pre-Budget use of cessation of
employment as a taxing point will be retained and the maximum 10 year
deferral period will be reduced to seven years.

Modifications to the original announcement are:

• increasing the income tax threshold for eligibility for the upfront tax
  concessions to $180,000, to align it with the top
  marginal tax rate threshold;
• providing further clarity
  on the meaning of “real risk of forfeiture” via the use of explanatory
  materials and Tax Office materials, including through the use of a
  range of example cameos to assist industry;
• • Employees receiving benefits under these schemes will not be able to
    pay tax upfront and the scheme’s governing rules must clearly
    distinguish these schemes from those eligible for the upfront tax
    exemption.
• moving the deferred taxing point
  from a point at which the taxpayer will no longer have a real risk of
  losing the share or right to a point at which:
• • in the case of shares, there is both no longer a real risk of the
    taxpayer losing the share and no restriction (present at acquisition)
    preventing the taxpayer from disposing of the share; and
  • in the case of rights to shares (options), there is both no longer a
    real risk of the taxpayer losing the right and no restriction (present
    at acquisition) preventing the taxpayer from either disposing or
    exercising of the right, however, if after exercising the right, the
    underlying share is subject to forfeiture and restrictions preventing
    the taxpayer from disposing of the underlying share, it is the point at
    which there is both no longer a real risk of the taxpayer losing the
    share and no restriction (present at acquisition) preventing the
    taxpayer from disposing of the share.
• allowing the deferral of tax in relation to up to $5,000 worth of
  shares under particular salary sacrifice based employee share schemes,
  where there is no real risk of forfeiture.
• removing
  the reporting requirement for employers to report the market value of
  employee share scheme benefits in the year of grant, if this is not the
  year in which the employee is taxed; and
• establishing a three part forward plan of consultation with industry by:
• • asking the Board of Taxation to examine two remaining issues (a) how
    best to determine the market value of employee share scheme benefits;
    and, (b) whether shares and rights under an employee share scheme that
    are provided by start-up, research and development and speculative-type
    companies should be subject to a tax deferral arrangement, despite not
    being subject to a real risk of forfeiture;
  • commit to
    an Exposure Draft process of the Bill to ensure the policy is
    accurately reflected in the application of the law, including
    consultation on a range of technical issues raised in submissions that
    will be contained in the Exposure Draft Bill; and
  • supplementing this process by asking the Board of Taxation to consult
    with stakeholders  to examine technical matters associated with the
    implementation of these reforms, and to report to Government in time to
    allow the Board’s views to be taken into account in the draft
    legislation.

A full reporting regime will also be introduced to significantly boost the integrity of the taxation of share schemes.

The combination of these final reforms and the measures out in the 5
June, 2009 consultation paper are set out in the attached Policy
Statement.

As previously announced, the existing law will
apply to all shares and rights acquired before 1 July 2009. The
Government will introduce the legislation during the Spring Sittings of
Parliament.