Chapter 8 - Transitional issues
8.1 Employee share schemes are often long-term arrangements, lasting three or more years. Additionally, new share schemes are set up fairly regularly by companies and it is important for companies and employee participants to have clarity around the tax laws when they enter into these arrangements.
8.2 Accordingly, it is important to consider transitional measures for existing and contemplated employee share schemes carefully. It is not desirable to put employers and employees in a position where employees are being granted employee share scheme benefits without certainty as to their tax treatment. However, it would also not be appropriate for employers and employees to be able to unduly extend the application of the existing rules by artificially qualifying for grandparenting grants of employee share scheme benefits which are not, in substance, intended to be conferred until a much later time.
Employee taxation
8.3 Considering the need to meet these objectives we propose that:
- where shares are acquired by an employee and taxed under the existing rules (before the enactment of any new rules), the taxation of that benefit would be dealt with solely under the existing rules (even if under the new rules a subsequent taxing point arises); but
- grandparenting would expire at the end of the third full tax year following enactment. For example, if enactment were to occur in June 2017, grandparenting would expire on 31 March 2021. Any transactions occurring after that date which trigger tax under the new rules would be taxed under the new rules, with an allowance for any tax already paid under the old rules.
Example 9: Transitional rule applies
Paul’s employer issues 1,000 shares worth $1,500 to a trustee on his behalf on 15 October 2016. The shares are issued for no consideration, and so give rise to assessable income to Paul of $1,500. The shares vest in Paul if he remains employed on 15 October 2018. On 30 June 2017, new employee share scheme tax rules are enacted, pursuant to which a similar grant of shares would be taxed only once the employment condition is satisfied, on the value of the shares at that time. The shares duly vest in Paul, and are worth $1,950 on vesting. However, because Paul acquired the shares before the enactment date of the new rules, and the employment condition is satisfied before 31 March 2021, Paul is not taxed when the shares vest in him.
Example 10: Transitional rule does not apply
Peter works for the same employer as Paul, and is issued the same number of shares at the same time, also for no consideration. However, Peter’s shares do not vest unless he is still employed on 15 October 2023. Peter does remain employed, and the shares vest in him on 15 October, 2023, at a time when they are worth $3,000. Peter will be taxed on $3,000 of income, less the $1,500 on which he paid tax in the 2016–17 year.
8.4 If Example 9 is modified so that instead of being given the shares, Paul:
- acquires the shares for $1,500, funded by an interest-free loan from his employer; and
- Paul has the right to sell the shares back to his employer for $1,500 if they do not vest,
there will be no change to the outcome. The taxing point under current law is still the acquisition of the shares, and that occurs before enactment.
Employer taxation
8.5 The employer’s position also needs to be considered. Our proposal for a deduction will not apply to employee share scheme benefits provided which are not taxable because of the grandparenting described above. Transitional rules will also be needed so that an employer is not able to take a deduction under the new rules for granting a benefit where the employer has already claimed a deduction for funding that same benefit under the existing rules. An example is where an employer has taken a deduction for a contribution to a trust for the benefit of employees, and the share benefit is provided by that trust.
Widely offered schemes
8.6 The transitional treatment of the current widely offered concessionary schemes also needs to be considered.
8.7 If it is decided that these schemes should not continue to be available, on what basis should that be done?
8.8 Most obviously, grants made under a concessional scheme:
- before enactment of these proposals would not be affected, and nor would the deemed employer deduction or the FBT treatment of any associated loan; and
- after enactment of these proposals would no longer be entitled to the current exemption, and nor would the associated loans.
8.9 If the concessionary schemes are retained, but the rules are amended, then other transitional approaches may be more appropriate.
Submission points
We are interested in readers’ views on this approach to implementation, and whether there are any other issues that need to be taken into account.