Employee share schemes and disposal restrictions
17 November 2021
Recently the ATO issued TD 2021/D5 providing more clarity on when the discount under employee share schemes (ESS) will be taxed where there are disposal restrictions on the ESS interests (i.e. shares or rights to shares).
As mentioned previously, where ESS interests are provided to employees at a discount, such discounts will be subject to upfront taxation (i.e. in the income tax year the ESS interests were acquired, unless the terms of the ESS provide that deferred taxation applies).
Relevantly, the deferred taxing point for ESS interests is the earliest of the following times:
When there are no longer any genuine restrictions on the disposal of the shares / rights (for example, being sold), and there is no real risk of the employee forfeiting the shares / rights;
When the rights are exercised and there is no real risk of the employee forfeiting the resulting share and there is no genuine restriction on the disposal of the resulting share;
When the employee is no longer employed by the company; and
At the end of 15 years.
As noted above, a key factor in two of the deferred taxing points is when genuine restrictions on disposal, that existed at the time the ESS interests were acquired, are lifted. Disposal restrictions added after the ESS interests were acquired are not relevant in determining the deferred taxing point
According to TD 2021/D5, the restrictions on disposal must have existed when the ESS interests were acquired and must be genuine. Therefore, the restriction must control or limit the power to voluntarily or compulsorily sell, transfer, assign, deal with, make over or part with the ESS interest (whether legally or beneficially) as set out by either the plan rules, the offer document, the company policies or the employment contract.
As a result, a plan’s disposal restrictions will be lifted on the first date on which the employee has an opportunity to dispose of their ESS interest (i.e. the first day the employee can deal with or realise their ESS interest by way of sale, transfer or gift).