Most senior employee plans have a vesting point at year 3. The first time that most companies’ shares/rights/options (securities) will vest under the new tax regime is 2012 because the new tax regime came into effect on 1 July 2009. So any security that was granted on or after 1 July 2009 is affected by the new taxation provisions.
For a LTIP (Long Term Incentive Plan) that uses shares the taxation point has stayed the same throughout the tax changes, i.e. it is usually been when vesting happens (unless there are further restrictions on the shares), so there should be no significant changes for these plans.
For rights and options the vesting point is a significant change (exercise was usually the previous taxation point now it is vesting). For options in particular you will now need to value the option at vesting (if there is no further restriction on exercise or on the underlying share). Companies will need to use the taxation tables in regulations. The table can be quite complex to use so the ATO have provided a calculator online that helps you calculate market value for options simply.
For rights, the value of the share is the value of the right at vesting so you should be able to follow the same process as you do for your share plans.
2. How to calculate the Market Value
Market Value for listed shares/vested rights is commonly determined by using the volume weighted average closing price for listed shares over a 5 trading period up to the day before the taxation date.
Market Value for options is determined using tables included in the Income Tax Assessment Regulations 1997. The online calculator that the ATO has provided can be used to assist with this calculation.
3. International assignees what is the general rule?
If an employee is in Australia at the taxation point, or has been in Australia for some or part of the plan period, and there may be some Australian tax obligation for that individual. If this is the case then a company should report to the ATO. This reporting need not calculate the exact taxation amount for the individual. The company can report on the whole amount and the international assignee will usually receive advice about what their exact taxation liability is (through the company’s advisors or their own advisors). The individual should then resolve any discrepancy, between the bulk taxable amount reported by the company and the actual taxable amount, direct with the ATO. This approach was taken by the ATO because of the complexity of this type of ESS reporting.
If a company is clear that the individual has no taxation liability in Australia then the company should exclude the employee from their ESS ATO reporting.
4. Tax Exempt ($1,000) Plans – How do they work?
Tax Exempt plans where the shares were allocated prior to 1 July 2009 do not need to be reported when the 3 year restriction ends. A company can assume that an employee has elected to be taxed immediately and that no tax is reportable post 1 July 2009. Companies can give their employees information using the ATO’s wording (this is called a reduced statement). This is not mandatory.
For plan granted post 1 July 2009 you will need to provide reporting. The plans are taxed at allocation and the valuation for the shares will happen then (see the Market Value point above). This could be a single point or several if you have a salary sacrifice plan. For all employees you report the full amount. A company is not required to determine whether an employee has total taxable income above $180,000 or not.
5. Why are TFNs important?
TFNs are important for employers to prevent an employer from having to pay withholding tax on the securities they grant to their employees. The way that the ESS reporting legislation works is that you need to report taxable transactions and there is no withholding on this amount unless you do not have the employee’s TFN/ABN.
Where you don’t have the TFN/ABN you will be required to submit the withholding tax amount to the ATO within 21 days of the financial year end. This amount can only be recovered from the employees’ salary and wages. You can also have a provision in the Plan Rules to recover this by the forced sale of the securities. Where an employee has left during the year and an employer has destroyed the TFN/ABN, and can not recover this data from the employee, they will be required to pay withholding tax. This amount can’t be recoverable from salary and wages so unless you have a provision in your Plan Rules that allows you sell sufficient securities to meet the withholding tax in you will have a withholding tax bill without the ability to recoup this cost.
6. How to self report
The first step for companies is to get a copy of the ATO data capture tool for completion. This is an excel spreadsheet that allows you to input information that can be used to produced the ATO statements and ATO report in the approved format. The ATO has a page about this on their site.
You can contact the ATO by phone or email for assistance.
- phone 1800 072 681
- email to ATO-ESS@ato.gov.au
7. Where to get started
A company needs to understand their plan and to understand when their employee will be taxed, e.g. at grant, at vesting, when they leave the company or when the rights/options/shares are no longer restricted (up to the 7 or old 10 year period). Highlighting the taxing points then allows you to review your data and identify if you have any taxation points under the plan that are reportable. If there are no taxable transactions then no reporting is required. If there is taxable transactions then you need to collate the employee data and calculate the Market Values so you can determine the taxable amounts for your employees.
The calculation is:
Market Value at the taxation point
X the number of securities
– (minus) any costs the employee paid for the shares
– (minus) tax withheld (if applicable, see the TFN point above)
= taxable income
The key dates are:
14 July – You need to provide your employees with their ESS ATO statements by 14 July each financial year where they have taxable transactions in that financial year.
14 August – You need to report to the ATO all taxable transactions by 14 August each financial year.
If you would like to know more about Employee Ownership and access to our membership site, where you can find out more detailed information about this area, please contact us for further information.