Ian Farmer

On October 21 2009, the Australian government introduced legislation into Parliament that proposed changes to the taxation of employee share plans. This follows a number of announcements made by the government since May 2009 that had led to a degree of uncertainty. Although the legislation is yet to be passed by the Senate, at this stage it does not appear that other parties will oppose it and therefore we expect it to be passed. This means companies can now move forward by making new awards under existing employee share plans and/or potentially redesigning their employee share plans, as many companies have been waiting for certainty before taking action.

What are the details?

The proposed legislative amendments have a number of significant differences from the rules now. Most notably:

• The conditions for tax deferral are now more stringent, with an additional requirement that shares or rights/options are subject to a 'real risk of forfeiture'.
• Generally this will mean that for share options and restricted stock unit type awards, taxation arises on vesting (where there is a real risk of forfeiture but there are no genuine disposal restrictions on the underlying shares). However, it should be noted that in Australia tax can be payable on an earlier date in certain circumstances, for example on the cessation of employment. Further conditions apply in relation to restricted shares (these are not covered in this note).
• Participants can no longer elect to be taxed at grant on their employee share awards.
• New employer reporting requirements have been introduced together with limited tax withholding for certain employee share awards.
• A new approach to the taxation of employee share awards for internationally mobile employees has been introduced which is expected generally to lead to less favourable outcomes than under the regime now.

If enacted, when will the new rules apply?

Once enacted, the new rules will apply to awards acquired on or after July 1 2009.

What actions should you take?

• Review the equity plans you operate and assess the impact the proposed changes will have on your plans. The changes will be particularly marked where share options are offered or there is no real risk of forfeiture.
• Put in place procedures to ensure that the correct data on taxable amounts is collected.
• Revisit employee communications.
• Ensure the equity and remuneration arrangements that you have in place are achieving their objectives.

Ian Farmer (ian.farmer@au.pwc.com), Sydney