Australian Taxation - Help Employees to Save Tax With an Employee Share Scheme

Some people are not aware that if they receive1997. The law only applies to "ESS interests" issued by
shares in a company for work they are doing (eithercompanies.
as an employee or otherwise) that the receipt ofIt is still the case, as a general statement, that the
these shares can be income on which tax is payable. Idiscount (referred to above) is subject to tax.
have noticed that this incorrect notion is moreHowever, the timing of when the discount will be taxed
prevalent in the small business community. This isand the amount of the discount that can be taxed is
probably because the issuing of shares is a "paper"determined by the type of employee share scheme.
transaction that may not require any money to changeDepending on whether a number of conditions have
hands. The value of the shares does not immediatelybeen met, up to $1,000 of the discount can be exempt
show up in anyone's bank account.from tax in the hands of the employee. Also, the
For many years the Australian taxation legislation hasemployer can get a tax deduction up to this amount in
had specific provisions that deal with the taxation ofrelation to each employee.
shares, or rights to shares, whether those shares orIt is also possible for the taxing point to be deferred.
rights have been received in an employment contextAgain, a number of conditions need to be met for this
or in the context of the provision of services. Normallyto be applicable. The employee share scheme rules
benefits are taxed under the Australian fringe benefitsdiscussed above do not apply if an "ESS interest"
tax law. Employee share schemes are an exceptionqualifies for deferred taxation. Further, the employer
to that general rule.does not receive a tax deduction.
Broadly, what the law tries to do is tax the "discount"The policy behind the new provisions is that low and
on the issue of the shares or the rights. This meansmiddle income earners should benefit from some tax
the difference (if any) between the market value ofconcession if they are offered shares in their employer
the shares or rights and what the recipient has to payat a discount. If an employee's adjusted taxable
for those shares or rights. For example, a personincome exceeds $180,000, the tax exemption of up to
receives 1,000 shares in his or her employer's$1,000 is not applicable. The new law says that one of
company and they have a market value of $5,000.its objectives is to increase the extent to which the
The person pays $2,000 for these. The differenceinterests of employees are aligned with those of their
between these two amounts ($3,000) is assessableemployers, by providing a tax concession to
income, except if certain concessions apply. It shouldencourage lower and middle income earners to
be noted that in this situation the person has notacquire shares under employee share schemes.
received any cash that could assist with funding theOne of the problems for the Australian Taxation
person's tax bill on the income.Office under the former law was knowing whether a
The rules in the Australian tax law that relate to theperson had received any benefits from an employee
taxation of employee share schemes have beenshare scheme. Under the new law, employers will be
changed with effect from 1 July 2009. They haverequired to report to the Commissioner of Taxation
been completely re-written and there are somecertain information to enable the Commissioner to
important changes to the way the law operates whenensure that the employee share scheme rules are
compared to the former law. The new law is found inbeing complied with.
Division 83A of The Income Tax Assessment Act