Commonwealth of Australia Explanatory Memoranda Commonwealth of Australia Explanatory Memoranda[Index] [Search] [Download] [Bill] [Help]
2008-2009
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
HOUSE OF REPRESENTATIVES
Tax Laws Amendment (2009 Budget Measures No. 2) Bill 2009
Income Tax (TFN Withholding Tax (ESS)) Bill 2009
EXPLANATORY MEMORANDUM
(Circulated by the authority of the
Treasurer, the Hon Wayne Swan MP)
Table of contents
Glossary 5
General outline and financial impact 7
Chapter 1 Reforming the taxation of employee share schemes 11
Chapter 2 Non-commercial losses 97
Chapter 3 Superannuation - Payment of lost member accounts to the
Commissioner of Taxation 113
Index 129
Glossary
The following abbreviations and acronyms are used throughout this
explanatory memorandum.
|Abbreviation |Definition |
|ABN |Australian Business Number |
|ATO |Australian Taxation Office |
|CGT |capital gains tax |
|Commissioner |Commissioner of Taxation |
|DASP Act |Superannuation (Departing |
| |Australia Superannuation |
| |Payments Tax) Act 2007 |
|ESS |employee share scheme |
|FBT |fringe benefits tax |
|FBTAA 1986 |Fringe Benefits Tax |
| |Assessment Act 1986 |
|ITAA 1936 |Income Tax Assessment Act |
| |1936 |
|ITAA 1997 |Income Tax Assessment Act |
| |1997 |
|IT(TP)A 1997 |Income Tax (Transitional |
| |Provisions) Act 1997 |
|MEC |multiple entry consolidated |
| |groups |
|S(UMLM) Act |Superannuation (Unclaimed |
| |Money and Lost Members) Act |
| |1999 |
|TAA 1953 |Taxation Administration Act |
| |1953 |
|Temporary Residents |Temporary Residents' |
|Act |Superannuation Legislation |
| |Amendment Act 2008 |
|TFN |tax file number |
|the Regulations |Income Tax Assessment |
| |Regulations 1997 |
General outline and financial impact
Reforming the taxation of employee share schemes
Schedule 1 to this Bill and the Income Tax (TFN Withholding Tax
(ESS)) Bill 2009 reform the taxation of employee share schemes by:
. replacing the current Division 13A of Part III of the
Income Tax Assessment Act 1936;
. inserting a new Division 83A into the Income Tax
Assessment Act 1997 dealing with employee share schemes;
and
. inserting a new Subdivision 14-C in Schedule 1 to the
Taxation Administration Act 1953 (TAA 1953) dealing with
the employee share scheme withholding tax, and a new
Division 392 in Schedule 1 to the TAA 1953 dealing with
employee share scheme reporting.
Date of effect: The changes apply to shares, rights and stapled
securities acquired on and after 1 July 2009.
In order to simplify the law and improve the interaction of the
employee share scheme rules with other areas of the law, shares,
rights and stapled securities acquired before this time will also
be brought within the new rules. However, transitional
arrangements will be provided to ensure the effect of the existing
law is maintained for securities acquired before 1 July 2009.
Proposal announced: This measure was first announced in the 2009-
10 Budget and in the Treasurer's Media Release No. 065 of
12 May 2009. Final details of the measure were announced in the
Assistant Treasurer's Media Release No. 011 of 1 July 2009.
Financial impact: This measure is estimated to have the following
revenue impact over the forward estimate period:
|2009-10 |2010-11 |2011-12 |2012-13 |Total |
|Nil |$35m |$45m |$55m |$135m |
Compliance cost impact: Low.
Non-commercial losses
Schedule 2 to this Bill amends the Income Tax Assessment Act 1997
to tighten the application of the non-commercial losses rules in
relation to individuals with an adjusted taxable income of $250,000
or more. These amendments will prevent high income individuals
from offsetting deductions from non-commercial business activities
against their salary, wage or other income.
Date of effect: These amendments apply to the 2009-10 income year
and later income years.
Proposal announced: This measure was announced in the 2009-10
Budget and in the Treasurer's Media Release No. 067 of 12 May 2009.
Financial impact: This measure will have these revenue
implications:
|2009-10 |2010-11 |2011-12 |2012-13 |
|Nil |$330m |$240m |$130m |
Compliance cost impact: Low.
Superannuation - Payment of lost member accounts to the Commissioner of
Taxation
Schedule 3 to this Bill amends the Superannuation (Unclaimed Money
and Lost Members) Act 1999 to require superannuation providers to
transfer the balance of a lost member's account to the Commissioner
of Taxation (Commissioner) where: the balance of the account is
less than $200; or the account has been inactive for a period of
five years and the provider is satisfied it will never be possible
to pay an amount to the member.
Date of effect: These amendments apply in relation to the last
unclaimed money day occurring before 1 July 2010 and later
unclaimed money days.
Proposal announced: This measure was announced in the 2009-10
Budget.
Financial impact: These amendments result in a gain to revenue
estimated at $238 million over the forward estimates period. These
amendments are also expected to increase government expenditure by
$8.4 million over this period.
| |2010-11 |2011-12 |2012-13 |
|Revenue |$187.3m |$39.2m |$11.5m |
|Related |$3.6m |$3.1m |$1.8m |
|expense | | | |
These amendments are expected to have a moderate ongoing financial
impact in subsequent years.
Compliance cost impact: Low to medium. Superannuation funds will
need to ensure their systems can enable eligible lost member
accounts to be transferred to the Commissioner. There should be
long term savings for funds as they will no longer need to
administer or apply member protection to those accounts transferred
to the Commissioner.
Chapter 1
Reforming the taxation of employee share schemes
Outline of chapter
1. Schedule 1 to this Bill and the Income Tax (TFN Withholding Tax
(ESS)) Bill 2009 reform the taxation of employee share schemes by:
. replacing the current Division 13A of Part III of the
Income Tax Assessment Act 1936 (ITAA 1936);
. inserting a new Division 83A into the Income Tax
Assessment Act 1997 (ITAA 1997) dealing with employee
share schemes; and
. inserting a new Subdivision 14-C in Schedule 1 to the
Taxation Administration Act 1953 (TAA 1953) dealing with
the employee share scheme withholding tax, and a new
Division 392 in Schedule 1 to the TAA 1953 dealing with
employee share scheme reporting.
Context of amendments
History
2. Under the general income tax law, if an employee is provided with
shares or rights under an employee share scheme, any discount that
the employee receives by acquiring the shares or rights below the
market price is a benefit relating to employment and so would
usually be considered income of the employee. However, the fringe
benefits law would also assess that discount (generally as a
property fringe benefit under Division 11 of Part III of the
Fringe Benefits Tax Assessment Act 1986). Where fringe benefits
tax (FBT) applies, the income tax law would treat the discount as
non-assessable non-exempt income to avoid double taxing the
benefit.
3. However, Division 13A of Part III of the ITAA 1936 provides a
specific regime which brings the discount to account as assessable
income in the year the employee acquires the share or right.
Double taxation is avoided because the fringe benefits law excludes
benefits assessed under Division 13A.
4. The law governing the taxation of benefits of employee share
schemes was previously located in section 26AAC of the ITAA 1936,
which applied from 1974. Generally, this section applies to the
acquisition of a share or right before 28 March 1995. In 1974,
section 26AAC replaced paragraph 26(e) of the ITAA 1936 as the
basis for taxing benefits acquired under an employee share scheme
following a court case which highlighted situations where
paragraph 26(e) was found to be insufficient.
5. Division 13A was introduced in 1995 to counter the arrangements
which exploited the then existing legislation. Division 13A sought
to ensure that the concessions available were directed at employee
share schemes which encourage investment by employees in their
employer company, or in their employer company's holding company,
and which are broadly available to all permanent employees.
Outline of existing law
6. Under the existing arrangements, employees who take part in an
employee share scheme are required to pay tax on any discount on
the market value of a share or right they receive from their
employer. This is currently the case in relation to both
qualifying share schemes, that are eligible for concessional
taxation, and non-qualifying share schemes.
7. Division 13A starts by taxing all discounts upfront. However, an
employee participating in a 'qualifying' employee share scheme can,
subject to certain conditions, choose one of two tax concessions on
the discount they receive - the 'upfront concession' or the 'tax-
deferred concession'.
8. An employee participating in a qualifying employee share scheme
that satisfies certain conditions can elect to be taxed on the
discount in the year they acquire the shares or rights, and receive
the benefit of a reduction of the discount by up to a $1,000 (the
'upfront concession'). The reduction is a tax concession.
9. Under the upfront concession, any subsequent capital gains on the
disposal of the shares or rights are subject to capital gains tax
(CGT), and the 50 per cent CGT discount may apply.
10. If an employee participating in a qualifying employee share scheme
does not make an election to be taxed upfront, they receive the
benefit of the 'tax-deferred concession'.
11. Under the tax-deferred concession, there is no $1,000 exemption but
the employee defers paying tax on the discount until the 'cessation
time'. A cessation time occurs at the earliest of the following:
. when the employee sells the shares or exercises the
rights;
. when the employment ceases;
. ten years after the shares or rights were acquired; and
. the later of:
- when restrictions on sale are lifted; and
- when forfeiture conditions cease to have effect.
12. Any increase in value of the shares or rights (before the cessation
time) is included in assessable income at the cessation time under
Division 13A. Therefore, the CGT discount is not available to
gains accrued before the cessation time. If a share or right is
not sold within 30 days of the cessation time, any capital gains
accrued after the cessation time remain subject to CGT, including
the CGT discount if available.
13. In comparison, if the shares or rights are issued under a non-
qualifying scheme the employee is taxed on the discount when they
acquire the shares or rights. This means they do not enjoy the tax
benefits associated with qualifying employee share schemes.
Budget announcement and changes
14. The Treasurer announced in the 2009 Budget that the Government will
better target eligibility for the employee share scheme tax
concessions and reduce opportunities for tax avoidance. The new
measures will also protect Commonwealth revenues needed to support
jobs and invest in vital nation-building in the face of the global
recession.
15. The Budget savings measure was designed to improve horizontal
equity in the tax system by treating all forms of remuneration more
consistently, to target employee share scheme tax concessions more
closely to low and middle income earners, and to reduce the scope
for losses to the Commonwealth revenue through tax evasion and
avoidance.
16. The Budget measure announced that all discounts on shares and
rights provided under an employee share scheme would be assessed in
the income year in which the shares and rights are acquired.
17. Responding to concerns expressed by stakeholders following the
Budget announcement, the Government issued a public consultation
paper which sought to better understand those concerns, and canvas
a number of options to improve the taxation of employee share
schemes.
18. On 1 July 2009, the Government issued a Policy Statement setting
out the taxation of employee share schemes. This statement
contained changes to the Budget announcement which took account of
industry concerns expressed in consultation, while still addressing
the acknowledged problems of tax evasion and tax avoidance.
19. Further public consultation was undertaken on an exposure draft of
the legislation and explanatory materials.
20. The Government has also asked the Board of Taxation to consider two
further issues raised in consultation.
21. The Board of Taxation will consider and report to Government how
best to determine the market value of employee share scheme
benefits. The Board of Taxation will also consider whether
employees of start-up, research and development and speculative-
type companies should benefit from a tax deferral arrangement
despite not being subject to a real risk of forfeiture. The Board
of Taxation will report to Government on these issues by the end of
February 2010.
Summary of new law
22. In order to simplify the existing arrangements, the new rules have
been rewritten into the ITAA 1997.
Objects
23. These Bills reform the taxation of employee share schemes.
24. The employee share scheme tax rules tax the value of benefits
received by employees under employee share schemes to ensure
taxpayers are taxed consistently regardless of the forms of
remuneration they receive.
25. However, the rules also specifically aim to improve the alignment
of employee and employer interests. In recognition of the economic
benefits derived from employee share scheme arrangements, the rules
provide for tax concessions for employees participating in employee
share schemes.
26. Tax support is provided on the grounds that aligning the interests
of employees and employers encourages positive working
relationships, boosts productivity through greater employee
involvement in the business, reduces staff turnover and encourages
good corporate governance.
Scope of the employee share scheme tax law
27. An employee share scheme provides employees with a financial
interest in the company they work for through the distribution of
shares in that company.
28. An ESS interest is defined as a beneficial interest in a share in a
company; or a beneficial interest in a right to acquire a
beneficial interest in a share in a company. For simplicity in
expression, throughout the chapter references may simply be to
shares or rights.
29. Generally, benefits provided by an employer to an employee in
respect of their employment would be taxed under the
Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986).
30. Consistent with the current law, the new law specifically exempts
'ESS interests' acquired under an employee share scheme from being
taxed as a fringe benefit under the FBTAA 1986.
31. Sometimes it is unclear whether a right to an employment benefit
will be received in the form of an ESS interest, or it is unclear
how many ESS interests will be received. If it becomes clear that
the right to the employment benefit will be received in a definite
number of ESS interests, it is taxed under the employee share rules
as though it were always clearly an ESS interest. This ensures
that employment benefits provided in the form of discounted shares
or rights to shares are taxed consistently.
32. The employee share scheme tax laws do not apply if the employee is
not provided with 'ESS interests'.
33. Once an ESS interest has been taxed under the employee share scheme
rules, it is subsequently taxed consistent with other capital
assets, most likely under the CGT regime, but possible under other
regimes such as the trading stock rules.
Upfront taxation
34. Generally, any discount to the market value of ESS interests in
shares or rights provided under an employee share scheme is taxed
upfront (that is, on acquisition). That means that the market
value of the discount must be included in an employee's assessable
income for that income year.
35. A $1,000 tax exemption is available to taxpayers participating in
an employee share scheme who pay tax upfront, if they have a
taxable income (after adjustments) of $180,000 or less, and the
employee and the scheme meet certain conditions.
36. The other conditions for the upfront concession are:
. the employee must be employed by the company offering the
scheme, or one of its subsidiaries;
. the scheme must be offered in a non-discriminatory way to
at least 75 per cent of Australian resident permanent
employees with three or more years service;
. the shares or rights provided must not be at real risk of
forfeiture;
. the ESS interests offered under the scheme must relate to
ordinary shares;
. the shares or rights must be required to be held by the
employee for three years or until the employee ceases
employment; and
. the employee must not receive more than 5 per cent
ownership of the company, or control more than 5 per cent
of the voting rights in the company, as a result of
participating in the scheme.
Deferred taxation
37. Although the economic value embodied in employee share scheme
shares and rights is equivalent to any other form of employee
compensation and should generally be taxed upfront in the same
manner, exceptions to this general principle are made for two forms
of employee share scheme - schemes where the ESS interests are at
real risk of forfeiture, and schemes where the ESS interests are
acquired under certain salary sacrifice arrangements.
38. Unlike the current law, whether a share or right is subject to
taxation upfront or at a later time depends on the structure of the
scheme and not an election of the employee. This reduces the tax
avoidance problems associated with the existing election
arrangements, because the employer can advise the employee and the
Australian Taxation Office (ATO) of the taxation arrangements
applying to that scheme.
39. For the deferred tax rules to apply:
. the relevant ESS interests must be acquired at a discount
under an employee share scheme, relate to ordinary shares
and be subject to a real risk of forfeiture; or
. the relevant ESS interests must be acquired under a salary
sacrifice arrangement, and the employee must receive no
more than $5,000 worth of shares under those arrangements
in an income year.
40. Certain other conditions must also be met (see paragraphs 1.152 to
1.188).
ESS interests at real risk of forfeiture
41. Deferral of taxation is considered the appropriate treatment in
situations where there is a real risk that the benefits of shares
or rights may never be realised because the ESS interests may be
forfeited.
42. An ESS interest is at real risk of forfeiture if a reasonable
person would consider that there is a real risk that the employee
would lose or forfeit the interest or never receive it, other than
by selling or exercising it, by intentionally taking no action to
realise the benefit, or through the market value of the ESS
interest falling to nil.
43. Providing for deferral of tax in these situations recognises that
the employee may never have a chance to realise the economic value
of the ESS interest, and that having employee remuneration 'at
risk' in this manner is consistent with the purpose of
concessionally taxing employee share schemes, to align the
interests of employees and employers.
ESS interests provided through a salary sacrifice scheme
44. The deferral arrangements also allow for ESS interests received at
a 100 per cent discount through a salary sacrifice arrangement to
be subject to deferred taxing treatment. The risk of forfeiture is
not necessary to get deferred taxation treatment through a salary
sacrifice scheme.
45. To be eligible for deferred taxation a salary sacrifice scheme must
relate to shares (not rights), the employee must receive the
shares, for no consideration (discount per share provided through
the arrangement is equal to the market value of the share), and the
employee must receive no more than $5,000 worth of shares. Certain
other conditions must also be met.
46. Providing for deferred tax in the case of employee share schemes
involving salary sacrifice arrangements ensures that certain
employees utilising similar arrangements under the existing law
will continue to be able to access these arrangements with minimal
disruption. This encourages the broad availability of, and
participation in, employee share schemes, and the broad alignment
of the interests of employees and employers in Australia.
47. This is particularly the case for low-to-middle employees, for whom
$5,000 of benefits is likely to have a greater significance.
The ESS deferred taxing point
48. When tax on an employee share scheme discount is deferred, it is
deferred until the 'ESS deferred taxing point' occurs.
49. The deferred taxing point for shares is the earliest of when:
. there is no real risk that the employee will forfeit the
share, or lose the share other than by disposing of it;
and there are no genuine restrictions preventing disposal;
or
. when the employee ceases the employment in respect of
which they acquired the share; or
. seven years after the employee acquired the share.
50. The ESS deferred taxing points for rights are based on similar
principles, with some additional conditions to account for
situations which would only arise in relation to rights (for
example, because they can be exercised as well as disposed of).
Employee share schemes and capital gains tax
51. ESS interests are exempted from CGT (in most cases) until the
interest has been taxed under the employee share scheme rules. As
the employee share scheme rules are intended to be the primary
taxing regime for 'ESS interests' during the period of deferred
taxation, application of the CGT provisions would potentially
result in double taxation.
52. Once an ESS interest has been taxed under the employee share scheme
rules, it is subsequently taxed consistent with other capital
assets, most likely under the CGT regime, but possible under other
regimes such as the trading stock rules.
53. The new employee share scheme rules ensure employees participating
in employee share schemes are taxed consistently regardless whether
the scheme utilises a trust structure.
Protecting the integrity of employee share schemes
54. The new rules are designed to protect the integrity of the taxation
of employee share schemes. A number of integrity provisions in the
current law are reproduced, and a number of new integrity
provisions are introduced.
Interests provided to associates
55. The new law treats employee share scheme interests provided to
associates of employees in relation to an employee's employment as
though the interest was in fact acquired by the employee rather
than the associate. This is similar to the treatment under the
current law.
56. This provision is designed to ensure that arrangements are not
artificially constructed to avoid the employee share scheme tax
rules, or to lessen a tax liability incurred in relation to 'ESS
interests', by providing benefits to associates of an employee.
Interests in a trust
57. The new law is designed to ensure that, when an employee has a
beneficial interest in shares in an employee share trust, that they
will be taxed as though they were the legal owner of those shares.
This is so that employees cannot lessen, delay or avoid their tax
liability by interposing a trust.
58. The rules essentially seek to ignore the interposed trust for tax
purposes.
Employer reporting
59. The new law requires employers who provide ESS interests to report
certain information to the Commissioner of Taxation (Commissioner),
to enable the Commissioner to ensure that the employee share scheme
tax law is being complied with.
60. These reporting requirements boost the integrity of the taxation of
share schemes, addressing concerns that the current employee share
scheme rules are not being complied with, that the Commissioner is
not in a position to know the full extent of that non-compliance,
and enabling the Commissioner to conduct data matching activities.
61. The reporting requirements also allow the Commissioner to pre-fill
tax returns to assist employees with their tax obligations.
62. The legislation outlines some of the particular information that
the Commissioner may require in the approved form. This is
provided to better illustrate the intent of the employer reporting
requirements, and to provide some guidance to employers and
employees as to the sort of information the Commissioner might
require.
63. The legislative guidance that is provided on what the Commissioner
may require in the approved form does not in any way limit the
information that the Commissioner may or may not require.
Withholding tax
64. The new law introduces a withholding tax, applicable in limited
circumstances, to ensure the integrity of the taxation of employee
share schemes.
65. Withholding tax is payable if an employer provides discounted
shares or rights to an employee, and that employee has not quoted
their tax file number (TFN) or their Australian Business Number
(ABN) to the employer by the end of the income year.
66. An employee refusing to provide their employer with a TFN or ABN
(as the case requires) undermines the new law relating to employer
reporting requirements, which are important in ensuring the tax
integrity of employee share scheme arrangements.
67. It is rare for an employee to refuse to provide their employer with
a TFN, so it is not expected that the withholding tax will be
commonly levied.
Interests may relate to past or prospective employers
68. An employee share scheme is a scheme under which employees
(including past or prospective employees) of a company acquire ESS
interests in relation to their employment.
69. The extension to past or prospective employees is an integrity
measure to ensure that arrangements are not deliberately designed
to occur before or after employment in order to avoid the employee
share scheme rules. This is consistent with the general treatment
of employment benefits elsewhere in the tax law, such as in the
FBTAA 1986.
Deduction by employers
70. Under the general income tax law, an employer would not be entitled
to a deduction for directly providing shares or rights to shares in
itself to its employees.
71. In order to encourage the provision of shares or rights under
certain employee share schemes, a limited specific deduction is
provided to employers. An employer can deduct an amount for shares
or rights they provide to employees under an employee share scheme
if the scheme meets the conditions for an employee to receive the
upfront concession. The income test for the upfront concession is
disregarded when calculating as employer's eligibility to claim a
deduction.
72. A general deduction may be available in relation to the indirect
provision of securities to employees under an employee share
scheme. An employer may provide money to an employee share trust
for the purpose of providing its employees with securities in
itself. The employee share trust may acquire the securities by
buying them on the market or by participating in a share issue by
the employer.
73. The deduction would generally occur in the income year in which the
employer incurred the loss or outgoing. However, such an
arrangement may allow an employer to artificially bring forward
future deductions by making contributions to the trust that are in
excess of its requirements under an employee share scheme. To
prevent an artificial bring forward of these deductions, the
employee share scheme rules delay the deduction until the employee
acquires an ESS interest.
Foreign employment
74. Consistent with the treatment of most other types of income,
whether an amount is included in a taxpayer's assessable income
under the new employee share scheme rules will depend on the
taxpayer's residency status and the source of the income.
75. There have been some changes to the treatment of foreign employment
to reflect changes recently made to the foreign employment tax
exemption in section 23AG of the ITAA 1936.
Refund of tax for forfeited shares
76. The new law provides for a refund of tax paid in relation to
discounted ESS interests in certain circumstances where those
interests are forfeited and the employee has been taxed on the
discount.
77. These provisions provide a refund of tax in circumstances where the
employee had no choice but to forfeit the ESS interest, except when
that choice was to cease employment, and where the conditions of
the scheme were not constructed to protect the employee from market
risk.
78. Under such circumstances, the forfeited ESS interest is treated as
never having been acquired, and the taxpayer can claim a refund of
income tax by seeking an amendment to their income tax assessment
to remove income previously included in their assessable income.
There is no time limit on amending an assessment to exclude an
amount from a taxpayer's assessable income for a share interest
which is forfeited, or for a right which was lost without being
exercised.
79. As the refund provisions are not intended to protect the employee
from downside market risk, a refund will not be available where the
share interest is forfeited due to a choice of the employee (except
when that choice was to cease employment), or a condition of the
scheme which has the direct effect of protecting the employee from
market risk.
Comparison of key features of new law and current law
|New law |Current law |
|Upfront taxation is the |Upfront taxation is the |
|default position. |default position. |
|Deferral of tax will be |An employee participating|
|limited to schemes which:|in a qualifying scheme |
| |can, subject to certain |
|require that any benefits|conditions, choose to |
|provided are at real risk|defer tax or pay tax |
|of forfeiture and meet |upfront. |
|certain other conditions;| |
|or | |
|are provided through a | |
|salary sacrifice | |
|arrangement offering no | |
|more than $5,000 worth of| |
|benefits to an employee, | |
|and where | |
|the rules of the scheme | |
|explicitly state that tax| |
|will be deferred; and | |
|the scheme and the | |
|employee meet certain | |
|other conditions. | |
|Eligibility for the |An employee may elect |
|upfront or deferred tax |between the upfront or |
|concession is based on |deferred tax concession |
|the characteristics of |if they acquire |
|the employee share |'qualifying' shares or |
|scheme. |rights. |
|Employees with a taxable |Employees in a qualifying|
|income (after |scheme can elect to be |
|adjustments) of less of |taxed upfront and not pay|
|than $180,000 will |tax on the first $1,000 |
|receive the upfront |of discounts received. |
|concession and not pay |There is no means |
|tax on the first $1,000 |testing. |
|of discounts received, if| |
|the scheme meets certain | |
|conditions. | |
|In schemes where the tax |Where an employee has |
|is deferred, the taxing |chosen to defer tax, the |
|point is the earliest of:|taxing point is the |
| |earliest of: |
|when there is no risk of |when restrictions on sale|
|forfeiture of the |are lifted; |
|benefits and any |when the employee sells |
|restrictions on the sale |the shares or exercises |
|or exercise are lifted; |the options; |
|when the employee ceases |when the employee ceases |
|employment; or |employment; or |
|seven years after the |ten years after the |
|shares or rights were |shares or rights were |
|acquired. |acquired. |
|An employee is eligible |An employee is eligible |
|for a refund of tax on |for a refund of tax on |
|forfeited shares and |forfeited rights only |
|rights if the forfeiture |(not shares). |
|was not the result of: |The refund is available |
|a choice of the employee |if the employee loses the|
|(except a choice to leave|right without having |
|employment); or |exercised it. |
|a condition of the scheme| |
|that protects the | |
|employee against a fall | |
|in market value. | |
|Employers are subject to |No equivalent. |
|annual reporting | |
|requirements. | |
|A limited form of |No equivalent. |
|withholding tax applies | |
|in cases where an | |
|employee fails to provide| |
|their employer with a TFN| |
|or ABN at the taxing | |
|point. | |
Detailed explanation of new law
80. Schedule 1 to this Bill and to the Income Tax (TFN Withholding Tax
(ESS)) Bill 2009 reforms the taxation of employee share schemes.
It also rewrites Division 13A from the ITAA 1936 into Division 83A
of the ITAA 1997.
81. Rewriting the existing provisions into the ITAA 1997 provides an
opportunity to simplify and improve the readability of the
provisions.
82. References in this explanation are to the ITAA 1997 unless
otherwise stated.
Objects of taxing employee share schemes
83. Any discount that the employee receives by acquiring an ESS
interest below the market price is a benefit relating to
employment, similar to salary or wages, and so would usually be
considered income of the employee. These amendments tax the value
of that discount, to ensure employees are taxed consistently
regardless of the form of remuneration they receive. [Schedule 1,
item 1, section 83A-1]
84. However, the employee share scheme tax rules also specifically aim
to improve the alignment of employee and employer interests.
85. In recognition of the economic benefits derived from employee share
scheme arrangements, the rules provide tax concessions for
employees participating in employee share schemes. [Schedule 1,
item 1, paragraph 83A-5(b)]
86. Tax support is provided on the grounds that aligning the interests
of employees and employers encourages positive working
relationships, boosts productivity through greater employee
involvement in the business, reduces staff turnover and encourages
good corporate governance.
87. Taxing discounts in the income tax system means that the employee
pays tax on the discount at their marginal tax rate. If this was
not the case, the discount would instead be subject to FBT, which
may be at a higher rate. [Schedule 1, item 1, paragraph 83A-5(a)]
88. Employees who pay tax upfront may receive an upfront tax
concession. The upfront tax concession reduces the amount of a
discount that an employee pays tax on, if they are a low or middle
income earner and the scheme meets certain conditions (see
paragraphs 1.105 to 1.123).
89. Alternatively, employees may receive a tax concession in the form
of a deferral of tax. If the scheme and the employee meet certain
conditions, the employee will defer tax on any discount to a later
period (see paragraphs 1.137 to 1.188).
Scope of the employee share scheme tax law
90. An employee share scheme provides employees with a financial
interest in the company they work for through the distribution of
shares or rights to shares in that company, or subsidiaries of that
company. [Schedule 1, item 1, subsection 83A-10(2)]
91. Whether or not a company is a subsidiary of another company is
determined in the same way it is determined under the Corporations
Act 2001. This test relates to the holding company's ability to
control the subsidiary company.
92. An ESS interest is defined as a beneficial interest in a share in a
company; or a beneficial interest in a right to acquire a
beneficial interest in a share in a company. For simplicity in
expression, throughout the chapter references may simply be to
shares or rights. [Schedule 1, item 1, subsection 83A-10(1)]
93. Generally, benefits provided by an employer to an employee in
respect of their employment would be taxed under the FBTAA 1986.
94. Consistent with the current law, the new law specifically exempts
ESS interests acquired under an employee share scheme from being
taxed as a fringe benefit under the FBTAA 1986. [Schedule 1,
item 8, paragraphs 136(1)(h) and (ha)]
95. ESS interests to which the employee share scheme rules apply are
also exempted from being taxed as benefits provided in respect of
employment, or non-cash business benefits. [Schedule 1, item 11,
subsection 21A(7) of the ITAA 1936 and item 23, paragraph 15-
2(3)(e)]
1. : Employee share scheme
Daniel is employed by Blackbooks Co, and as a part of
Daniel's total employment remuneration package, Blackbooks
Co provides Daniel with discounted shares in Blackbooks.
Providing the scheme meets certain criteria, the shares that
Daniel receives are ESS interests, provided under an
employee share scheme.
As such, Daniel's shares will be taxed under the employee
share scheme tax laws, and not taxed under the FBTAA 1986.
96. Sometimes it is unclear at the time of acquisition whether a right
to an employment benefit will be received in the form of an ESS
interest, or it is unclear how many ESS interests will be received
at the time the right is granted. If and when it becomes clear
that the right to the employment benefit will be received in a
definite number of ESS interests, it is taxed under the employee
share scheme rules as though it were always clearly an ESS
interest. See paragraphs 1.367 to 1.372 for further discussion of
these types of benefits.
97. This provision would apply, for example, to an employment benefit
that is a right to an indeterminate number of shares, or to a
benefit that may be received in shares, in cash, or in some other
form. The provision ensures that employment benefits provided in
the form of discounted shares or rights to shares are taxed
consistently.
98. The employee share scheme tax laws do not apply if the employee is
not provided with ESS interests.
99. The employee share scheme rules only apply to ESS interests
acquired at a discount. [Schedule 1, item 1, subsection 83A-20(1)]
100. Once an ESS interest has been taxed under the employee share scheme
rules, it is subsequently taxed consistent with other capital
assets, most likely under the CGT regime, but possible under other
regimes such as the trading stock rules.
Upfront taxation (inclusion of discount in assessable income on
acquisition)
Upfront taxation is the default position
101. Generally, any discount to the market value of ESS interests in
shares or rights provided under an employee share scheme is taxed
upfront on acquisition. That means that the value of the discount
must be included in an employee's assessable income for that income
year. [Schedule 1, item 1, section 83A-15 and subsection 83A-
25(1)]
102. The discount is the market value of the ESS interests less any
consideration paid or to be paid by the employee.
1. : Inclusion of a discount in assessable income
Liz is employed by Pink Boats Inc. She receives Pink Boat
shares with a market value of $100,000 for $50,000 of her
money under an employee share scheme. This means that she
has received a discount of $50,000, which will be included
in her assessable income upon her acquisition of the ESS
interests.
103. ESS interests provided under an employee share scheme will be taxed
upfront unless the interest was acquired through a scheme that
meets the conditions for deferred taxation (or the interest has
already effectively been taxed under the employee share scheme
rules).
104. An employee may acquire an interest that has already in effect been
taxed, if for example, they exercise a right to acquire a share
that was already subject to tax under the employee share scheme
rules. In this situation they should not be taxed twice, simply
because they have undertaken a multi-step process to acquire the
share. [Schedule 1, item 1, subsection 83A-20(2)]
105. Consistent with the treatment of most other types of income,
whether an amount is included in a taxpayer's assessable income
under the new ESS rules will depend on the taxpayer's residency
status and the source of the income (paragraphs 1.347 to 1.366).
[Schedule 1, item 1, subsection 83A-25(2)]
Market value
106. By default, the ordinary meaning of market value is used for
determining the value of ESS benefits. The expression market value
is used with its ordinary meaning, however, in some cases that
meaning is affected by the rules in Subdivision 960-S of the ITAA
1997.
107. The new employee share scheme rules use the ordinary meaning of
market value as this meaning is used for almost all other tax
purposes, and the increased flexibility that this provides means
that taxpayers are able choose a valuation methodology that fits
their circumstances and has the lowest compliance costs associated
with it. The ATO publishes material on working out market value
which can be found in the ATO's guide Market value for tax
purposes.
108. Subdivision 960-S provides that any conditions and restrictions
that prevent a taxpayer from converting the ESS interest into money
are ignored in calculating market value (see section 960-410 of the
ITAA 1997).
109. This Schedule introduces a new rule in to Subdivision 960-S to make
it clear that when an amount of which market value is a component
is referred to in the law, such as the amount of a discount, the
rules in Subdivision 960-S apply to calculating the market value
component of that calculation. [Schedule 1, item 66, section 960-
415]
110. The method for calculating the value of an ESS interest can also be
specified by regulation in the Income Tax Assessment Regulations
1997 (the Regulations). If the Regulations specify a specific
amount, taxpayers must use this amount instead of the market value
in relation to the interest. The Government proposes that the
existing rules in relation to unlisted rights be replicated in the
Regulations as an interim measure until the Board of Taxation
completes its review on how best to determine the market value of
employee share scheme benefits. [Schedule 1, item 1, section 83A-
315]
111. The Regulations may give a choice between using market value and a
specified amount.
112. The valuation rules in the current law are inflexible and often
result in compliance costs for taxpayers, particularly those with
unlisted shares. However, taxpayers could continue to apply the
existing detailed methodologies in the current employee share
scheme rules as these would fall within the scope of those
methodologies the ATO currently considers acceptable under the
general rules.
113. The general valuation rules for unlisted shares mean that taxpayers
will no longer be obliged to use an auditor if they can determine
(and sufficiently justify) the market value appropriately without
one.
The upfront tax concession
114. Employees who pay tax upfront may receive the upfront tax
concession, if they are low or middle income earners and the
employee and the scheme meet a number of conditions. [Schedule 1,
item 1, section 83A-35]
115. The upfront concession provides that an employee does not include a
discount on ESS interests in their assessable income if the value
of the combined discounts is $1,000 or less. If the discounts are
greater than $1,000, they may reduce the amount they include in
their assessable income by $1,000 (meaning that they are assessed
on the excess over $1,000). [Schedule 1, item 1, subsection 83A-
35(1) and paragraph 83A-35(2)(a)]
Income test
116. The new law introduces an income test for the upfront concession to
restrict eligibility to low and middle income earners.
117. Employees are not eligible for the upfront concession if their
taxable income for the year, after adjustments, is greater than
$180,000. Taxable income is adjusted by adding an employee's
reportable fringe benefits, reportable superannuation contributions
and total net investment loss for the year. This ensures that the
test uses a more complete calculation of an individual's income
than taxable income alone. [Schedule 1, item 1, paragraph 83A-
35(2)(b)]
1. : Employee is eligible for upfront concession
Matt is employed by Apple Bank Pty Ltd, and acquires shares
in Apple Bank at a $1,500 discount to their market value
under an employee share scheme. The scheme is not eligible
for deferral.
When the Commissioner assesses Matt's income tax for the
year, his taxable income adjusted by reportable fringe
benefits, reportable superannuation contributions and total
net investment loss is $80,000 (this calculation disregards
any application of the upfront discount).
If Matt and Apple Bank's scheme meets the other conditions,
Matt will receive the upfront concession, and will reduce
the amount of the discount included in his assessable income
by $1,000. He will still include the remaining $500 in his
assessable income.
2. : Employee is not eligible for upfront concession
Liam is employed by Starstruck Co, and acquires shares in
Starstruck Co at a $1,000 discount to their market value
through an employee share scheme. The scheme does not meet
the conditions for deferral.
When the Commissioner assesses Liam's income tax for the
year, his taxable income adjusted by reportable fringe
benefits, reportable superannuation contributions and total
net investment loss is $200,000.
Although Liam and Starstruck Co's scheme may meet the other
conditions to access the upfront concession, Liam's income
is too high to receive the upfront concession. He must
include the full amount of the discount in his assessable
income for that year.
Must be employed
118. The upfront concession is only available if, at the time of
acquiring the interest, the employee is employed by the company
offering the scheme, or one of its subsidiaries. [Schedule 1, item
1, subsection 83A-35(3)]
119. This ensures that the concession only applies in situations where
there is the necessary employment relationship to align employer
and employee interests.
Scheme must relate to ordinary shares
120. The ESS interests offered under the scheme must relate to ordinary
shares. [Schedule 1, item 1, subsection 83A-35(4)]
121. Shares that are not ordinary shares, such as preference shares, may
have less 'risk' associated with them. For example, they may pay a
more stable income stream or have priority over ordinary shares in
the event of bankruptcy. They are therefore less likely to align
the employee's interest with that of the company.
Scheme must be non-discriminatory
122. To encourage the wide availability of employee share schemes and
the associated productivity benefits, the scheme must be operated
on a non-discriminatory basis. This means that the scheme must be
available to at least 75 per cent of Australian resident permanent
employees of the employer with three years service (whether
continuous or non-continuous service). [Schedule 1, item 1,
subsection 83A-35(6)]
123. To be non-discriminatory the essential features of the employee
share scheme offer must be the same for least 75 per cent of
Australian resident permanent employees of the employer with
three years service. The essential features of the scheme include:
. the consideration required to be paid by the employee to
acquire the ESS interests;
. the number or value of the ESS interests offered to each
employee;
. the time for acceptance of the offer; and
. the steps taken for the circulation of information about
the offer.
124. While the non-discriminatory requirement is to encourage schemes to
be available as widely as possible, the scheme is only required to
be offered to permanent employees with three years service, and
only to 75 per cent of permanent employees with three years
service, because it may be difficult in practice to offer the
scheme to all employees (for example, casual employees).
125. The scheme is only required to be offered to 75 per cent of
Australian resident permanent employees to ensure employers with a
significant percentage of foreign employees can offer employee
share schemes to their Australian employees without undue
complexity.
Shares or rights provided must not be at real risk of forfeiture
126. The ESS interests provided through the scheme must not be at real
risk of forfeiture. [Schedule 1, item 1, subsection 83A-35(7)]
127. An ESS interest is at real risk of forfeiture if a reasonable
person would consider that there is a real risk that the employee
would lose or forfeit the interest or never receive it, other than
by selling or exercising it, by intentionally taking no action to
realise the benefit, or through the market value of the ESS
interest falling to nil. For more discussion of real risk of
forfeiture, see paragraphs 1.155 to 1.162.
128. Subject to some limitations, it is considered appropriate for tax
to be deferred on ESS interests that the employee may never in fact
receive.
Minimum holding period
129. The ESS interest provided cannot be disposed of for three years,
unless the employee ceases to be employed at an earlier time.
[Schedule 1, item 1, subsection 83A-35(8)]
130. An employee is considered to have ceased employment when they are
no longer employed either by their employer, a holding company of
their employer, or a subsidiary of either of them. [Schedule 1,
item 1, section 83A-330]
131. This minimum period ensures that the concession is only provided
where there is sufficiently lengthy alignment of interests between
the employee and employer. If the minimum holding period were not
in place an employee could access the upfront tax concession,
effectively receiving $1,000 in untaxed remuneration, and
immediately sell the ESS interest for cash. This is not consistent
with the intended aim of offering the tax concession in order to
align employee and employer interests.
132. A situation in which an employee ceases employment primarily to
avoid the employee share scheme rules, such as the requirement for
a minimum holding period, only to recommence employment with the
same employer shortly after, will likely be subject to the general
anti-avoidance rules.
Employee must not have significant ownership or voting rights
133. The interest provided to an employee must not result in the
employee having effective ownership of greater than 5 per cent of
their employer, and not controlling more than 5 per cent of the
maximum voting rights in the employer. [Schedule 1, item 1,
subsection 83A-35(9)]
134. This provision encourages the benefits of the employee share scheme
to be spread widely among employees. The concession is intended to
encourage employees with small or no ownership in their employer to
take up an interest in the company. It is considered that if one
employee owns more than 5 per cent of the voting rights, interests
between the company and that shareholder are already aligned, and
no tax concession is appropriate or warranted.
135. Further, this acts as an integrity rule that prevents taxpayers
from misapplying the concession in order to buy a business or
indirectly access company profits through the employee share scheme
rules. The concession is intended to apply in respect of the
employee/employer relationship and not in relation to the
company/shareholder relationship.
136. The 5 per cent rule is administered on an employee by employee
basis. That is, any individual employee breaching the 5 per cent
rule will make that employee ineligible for the upfront exemption,
but have no impact on other employees participating in the scheme.
Deferred taxation (the deferred inclusion of a gain in assessable income)
Deferred taxation
137. Although the economic value embodied in employee share scheme
shares and rights is equivalent to any other form of employee
compensation and should generally be taxed upfront in the same
manner, exceptions to this general principle are made for two forms
of employee share scheme - schemes where the ESS interests are at
real risk of forfeiture, and schemes where the ESS interests are
acquired under a salary sacrifice arrangement. [Schedule 1, item
1, section 83A-100]
138. Unlike the current law, whether a share or right is subject to
taxation upfront or at a later time depends on the structure of the
scheme and not an election of the employee. This reduces the tax
avoidance problems associated with the existing election
arrangements.
139. Removing the election also makes it easier for employers to comply
with the new reporting requirements (see paragraphs 1.281 to
1.297).
140. For the deferred tax rules to apply, the relevant ESS interests
must be acquired at a discount under an employee share scheme, be
subject to a real risk of forfeiture, and meet a number of other
conditions (see paragraphs 1.155 to 1.162 for discussion of real
risk of forfeiture). Alternatively, tax can be deferred on an ESS
interest (that is a beneficial interest in a share or stapled
security) acquired under salary sacrifice arrangements if the
employee gets no more than $5,000 worth of shares under those
arrangements in an income year. The employee share scheme rules
for upfront taxation do not apply if an ESS interest qualifies for
deferred taxation. [Schedule 1, item 1, subsection 83A-105(1)]
141. When tax is deferred, the market value of the ESS interest minus
the cost base of that interest is generally included in assessable
income in the first income year it is possible to dispose of or
exercise that interest. If employment ceases earlier, or if seven
years pass, the relevant amount is included in that income year
instead (see paragraphs 1.189 to 1.202 for the 'ESS deferred taxing
point').
142. Consistent with the rest of the employee share scheme rules, the
deferral rules also do not apply to a share acquired by exercising
a right that has already been taxed under the employee share scheme
rules, as outlined in paragraph 1.104. [Schedule 1, item 1,
subsection 83A-20(2) and paragraph 83A-105(1)(a)]
143. For deferred taxation to apply, the scheme which the ESS interest
is acquired under must also meet a number of further conditions
(see paragraphs 1.137 to 1.188 for a more detailed explanation).
Amount to be included in assessable income
144. Under deferred tax arrangements, the market value of the ESS
interest at the deferred taxing point reduced by the cost base of
the ESS interest is included in assessable income for the income
year in which the deferred taxation point occurs. [Schedule 1,
item 1, subsection 83A-110(1)]
145. The market value substitution rule located in section 112-20 of the
ITAA 1997 is ignored for the purpose of calculating the cost base
of the asset and the amount to be included in assessable income.
The market value substitution rule located in section 116-30 of the
ITAA 1997, which generally applies to assets received for no
capital proceeds, is also turned off. [Schedule 1, item 40,
subsection 130-80(4)]
146. If these rules were not ignored the value of the discount to the
employee would not be correctly taxed.
147. Consistent with the treatment of most other types of income,
whether an amount is included in a taxpayer's assessable income
under the new ESS rules will depend on the taxpayer's residency
status and the source of the income (see paragraphs 1.347 to
1.366). [Schedule 1, item 1, subsection 83A-110(2)]
Calculating the value of shares at the taxing point
Market value
148. By default, the ordinary meaning of 'market value' is used for
determining the value of ESS interests. The expression market
value is often used with its ordinary meaning, however, in some
cases it has a meaning affected by Subdivision 960-S of the ITAA
1997. An alternative method of valuation can be specified in the
Regulations. Paragraphs 1.106 to 1.113 provide further discussion
on market value and valuation methodologies.
Cost base
149. The current employee share scheme rules calculate the discount on
an ESS interest as market value less consideration paid or given.
150. Consideration paid or given does not take into account expenses
such as interest and brokerage fees, or events such as value
shifting, a return of capital or other expenses incurred in holding
the asset that would alter the cost base.
151. The new law instead uses the tax concept of cost base, which takes
into account a more comprehensive set of expenses and events. Cost
base is a more appropriate base on which to calculate the discount
and gains on the ESS interest up to the taxing point.
1. : Calculating the cost base
Joan acquires ESS interests in his employer, Raceway Co
through an employee share scheme. She purchases the ESS
interests for $1,000, at a 50 per cent discount to their
market value of $2,000, and Raceway Co passes on brokerage
fees of $50 to Joan.
The cost base of Joan's ESS interests is $1,050.
2. : Modifying the cost base
John acquires ESS interests in his employer, Jawbreaker Co
through an employee share scheme. The ESS interests have a
market value of $1,000. Jawbreaker's scheme meets the
conditions for deferred taxation.
John pays $100 for the interests, and has a cost base of
$100.
Six months after acquiring the interests, Jawbreaker Co
returns 30 per cent of its capital to its shareholders, and
John receives $300.
This return of capital will reduce John's cost base to nil.
The remaining $200 will be assessed as a capital gain in the
income year that it is received.
ESS interests at real risk of forfeiture
152. In situations where there is a real risk that the benefits of
shares or rights are never realised because the ESS interests may
be forfeited, deferral of taxation is considered the appropriate
treatment.
153. Providing for the deferral of tax in these situations recognises
that the employee may never have a chance to recognise the economic
value of the ESS interest, and that having employee remuneration
'at risk' in this manner is consistent with the purpose of
concessionally taxing employee share schemes, namely to align the
interests of employees and employers.
154. If an ESS interest is at real risk of forfeiture, and the scheme
meets the other conditions outlined in the rules, taxation will be
deferred until the ESS deferred taxing point (see paragraphs 1.189
to 1.202 for discussion of the ESS deferred taxing point).
The real risk of forfeiture test
155. To defer tax under the real risk of forfeiture test:
. in the case of a share, there must be a real risk under
the conditions of the scheme that the employee will
forfeit the share, or lose it other than by disposing of
it; or
. in the case of a right to acquire a beneficial interest in
a share:
- there must be a real risk that, under the conditions of
the scheme, the employee will forfeit the right, lose it
other than by disposing of it, exercising it or letting
it lapse; or
- there must be a real risk that, under the conditions of
the scheme, if the employee exercises the right to get a
beneficial interest in a share, they will forfeit the
beneficial interest in the share, or lose it other than
by disposing of it.
[Schedule 1, item 1, subsection 83A-105(3)]
156. The 'real risk of forfeiture' test does not require employers to
provide schemes in which their employee share scheme benefits are
at a significant or substantial risk of being lost. However,
'real' is regarded as something more than a mere possibility.
Something is not a real risk if a reasonable person would disregard
the risk as highly unlikely to occur or as nothing more than a rare
eventuality or possibility.
157. Forfeiture of an ESS interest may occur through a legal compulsion
to transfer the ownership of an ESS interest back to the entity
from which it was acquired, for example the return of the ESS
interest to an employee share trust.
1. : Compulsory transfers of an ESS interest may be forfeiture
Byron enters into an employee share scheme arrangement with
his employer, EightBall Co. Byron acquires legal ownership
of 100 EightBall Co shares under an employee share scheme,
but will be legally compelled to transfer these shares to a
pooled employee share trust if in one year he has not met
certain sales targets.
Real risk of forfeiture: Yes, Byron's shares are at real
risk. If he meets the other conditions for deferral, he
will defer tax until the 'ESS deferred taxing point'.
158. The 'real risk of forfeiture' test is intended to provide for
deferral of tax when there is a real alignment of interests between
the employee and employer, through the employee's benefits being at
risk. The test is a principle based test, intended to deny
deferral of tax where schemes contrive to present a nominal risk of
forfeiture, without complying with the intent of the proposed law.
1. : Contrived risks
'Your shares are forfeited if the company's value falls by
95 per cent during the next 12 months' or 'your shares are
forfeited if you request they be forfeited' are not real
risks.
159. Real risk includes situations in which a share or right is subject
to meaningful performance hurdles or the securities will be
forfeited if a minimum term of employment is not completed.
160. A condition that merely restricts an employee from disposing of a
share or right for a specified time carries with it no real risk of
forfeiture.
1. : Forfeiture on cessation of employment
Ulrick enters an employee share scheme arrangement with his
employer, Retrorocket Ltd. He will receive 1,000
Retrorocket shares in 12 months, if he is still employed by
Retrorocket at that time.
Real risk of forfeiture: Yes, Ulrick's rights to receive
shares are at risk because he will forfeit them if he leaves
the company. If he meets the other conditions for deferral,
he will defer tax until the 'ESS deferred taxing point'.
2. : Forfeiture on cessation of employment - a good leaver who leaves
for reasons beyond their control
Jeanette enters into an employee share scheme arrangement
with her employer, Zither Co. She will receive 1,000 Zither
Co shares in three years, if she is still employed by Zither
Co at that time.
Further, Zither Co will grant her shares to her if she
ceases employment before three years for a reason beyond her
control, such as sickness, invalidity, being made redundant,
or Zither Co being sold or liquidated, under a 'good leaver
clause'.
Real risk of forfeiture: Yes, Jeanette's rights to receive
shares are at risk and she will defer tax for three years.
However, if employees at Zither Co routinely received their
shares regardless of their reason for leaving, the ATO may
consider that the scheme has contrived a 'real risk' and is
not eligible for deferral of tax.
3. : Forfeiture on cessation of employment - retirement
Gary enters into an employee share scheme arrangement with
his employer, Jackhammer Co. He will receive 7,000
Jackhammer shares in three years time, unless he ceases
employment before that time, except if he ceases employment
to retire.
To meet the retirement condition, the scheme requires Gary
to be above a certain retirement age, and to be leaving the
work force. Gary is within six months of retirement.
Real risk of forfeiture: No, Gary does not have a real risk
of losing his shares. This is because at the time of
acquisition Gary knows that the good leaver provision will
protect him from any real risk of losing the shares.
4. : Minimal risk contrived to gain deferral
Cucumber Co has opened an employee share scheme where the
shares are subject to forfeiture in the first three months
if the employee leaves the company. The shares cannot be
sold in the first five years.
Real risk of forfeiture: No. This scheme appears to have
contrived a real risk of forfeiture over a very short period
of time, in order to gain access to a relatively long period
of deferral. This is not a real risk, and the shares will
be subject to upfront taxation.
5. : Fraud or gross misconduct
Joe enters into an employee share scheme arrangement with
his employer, Gusto Co. He receives 1,000 Gusto shares, but
will forfeit them if he is dismissed for fraud or gross
misconduct in the next three years.
Real risk of forfeiture: No, Joe's shares are not at any
real risk. A reasonable person would not consider there to
be a real risk of forfeiture in relation to the scheme.
Joe's decision to commit fraud or misconduct is entirely
within his own control.
6. : Performance hurdles - market share
Amy enters into an employee share scheme arrangement with
her employer, Crackerjack Co. She will receive 1,000
Crackerjack Co shares in one year, if Crackerjack Co's
market share has increased by 10 per cent in 12 months time.
Crackerjack Co's market share was steady over the previous
12 months.
Real risk of forfeiture: Whether or not a real risk of
forfeiture is present is a question of fact and
circumstance.
In this case, the circumstances indicate a real risk that
Amy's rights to receive shares could be forfeited. She will
defer tax for the year.
7. : Performance hurdles - market price increasing
Jacob enters into an employee share scheme arrangement with
his employer, Snowsuit Co. He receives rights to 1,000
Snowsuit Co shares in one year's time, if Snowsuit Co's
share price has increased 10 per cent in 24 months time.
Snowsuit Co's share price has performed broadly in line with
the sector index over the past five years, but has
outperformed the consumer price index by an average 2 per
cent.
Real risk of forfeiture: Whether or not a real risk of
forfeiture is present is a question of fact and
circumstance.
In this case, there is a real risk that Snowsuit Co's share
price would not increase by 10 per cent. Jacob's right to
receive to the shares is at risk and he will defer tax until
the 'ESS deferred taxing point'.
8. : Performance hurdles - market price maintained
Sarah enters into an employee share scheme arrangement with
her employer, Pepper Co. She receives rights to receive
1,000 Pepper shares in one year, if Pepper's share price has
maintained its value in 24 months time.
The value of Pepper's share price has fallen 50 per cent in
the last 12 months, and the company is facing financial
hardship.
Real risk of forfeiture: Whether or not a real risk of
forfeiture is present is a question of fact and
circumstance.
In this case, there is a real risk that Pepper's share price
will fall further in the next 24 months. Sarah will defer
tax until the 'ESS deferred taxing point'.
9. : Performance hurdles - market price maintained
Nina enters into an employee share scheme arrangement with
her employer, Salt Co. She receives rights to receive 1,000
Salt shares in one year, if Salt's share price has
maintained its value in 24 months time.
The value of Salt's share price has risen by over 20 per
cent each year for the past six years. Salt is forecasting
continuing good performance.
Real risk of forfeiture: Whether or not a real risk of
forfeiture is present is a question of fact and
circumstance.
In this case, a reasonable person would not consider that
Nina has a real risk of forfeiting her shares, given Salt's
previous and continuing good performance and the relatively
low performance hurdle Salt's share price is required to
overcome.
10. : Performance hurdles over a portion of ESS interests
Pat enters into an employee share scheme arrangement with
his employer, Maraca Co. He will receive 1,000 Maraca Co
shares in one year if Maraca Co's market share increases
over the year, and 500 Maraca Co shares in one year if it
does not. There are no restrictions placed on latter 500
shares, and Pat will receive them regardless of whether he
is still employed with Maraca Co in one year.
Real risk of forfeiture: Yes, but only in respect of 500
shares. Five hundred of Pat's rights to shares are at risk
and he will defer tax on these for the year. However, Pat's
other 500 rights to shares are not at risk, and he will pay
tax upfront on the entitlement to these shares.
11. : Employee controlled risk
Maria works for Mustard Ltd, and is granted options which
require her to regularly save a certain amount of post-tax
money in an approved bank account to enable exercise of the
options. The plan rules provide that, if the employee stops
the regular savings, all of the options lapse.
There are no other conditions of the scheme that would
result in Maria forfeiting the options.
Real risk of forfeiture: No. Maria will not be able to
defer tax on the options. The decision to deposit a certain
amount of money in a bank account is entirely within Maria's
control and there is no real risk in the scheme.
12. : Employee controlled risk - prohibition on sale of original
shares
Olivia works for Dressmakers Ltd, and she purchases some
Dressmakers Ltd shares with her post-tax money and is
granted, at that time, a matching right to an equivalent
number of free shares in two years time if she does not sell
the original shares over that two-year period. If she sells
the original shares before two years have elapsed, the
matching rights will lapse.
There are no other conditions of the scheme that would
result in Olivia forfeiting the options.
Real risk of forfeiture: No. There is no real risk that
Olivia will not be able to simply retain a number of shares
over which she has legal ownership and no risk of
forfeiture, so Olivia will not be able to defer taxation of
the rights. The issue is that the decision to hold or not
hold the shares is entirely within Olivia's control.
161. Whether a condition by which ESS interests were forfeited only if
the employee left employment to join a competitor is sufficient to
constitute real risk of forfeiture will depend on the circumstances
of the individual case. In cases where it appears unlikely that an
individual could take a comparably skilled job without forfeiting
the ESS interest, such a restriction will likely be sufficient.
162. A condition that ESS interests will be forfeited if the employee
leaves to work for any other employer will constitute a real risk
of forfeiture in most circumstances.
1. : ESS interests likely to be forfeited if employee ceases
employment
Saskia is a doctor employed by a hospital with 10 years
experience. Saskia receives shares through the hospital's
employee share scheme, but will forfeit the shares if she
leaves the hospital to work in the medical industry in
Australia within the next five years.
Real risk of forfeiture: Yes. Saskia is a highly skilled
employee who would likely find it difficult to find a
comparably skilled job outside the medical industry. Her
shares are at real risk of forfeiture.
Scheme must relate to ordinary shares
163. The shares or rights offered under the scheme must relate to
ordinary shares. [Schedule 1, item 1, paragraphs 83A-105(1)(b) and
(c) and subsection 83A-35(4)]
164. Deferred taxation is restricted to interests over ordinary shares
to encourage the alignment of employee and employer interests. ESS
interests that are not ordinary shares, such as preference shares,
may have less 'risk' associated with them because they pay a more
stable income stream and have priority over ordinary shares if the
company winds up. They are therefore less likely to align the
shareholder's interest with that of the company.
Schemes must be broadly available (in respect of shares)
165. The employer must offer a scheme or schemes that are available to
at least 75 per cent of the Australian resident permanent employees
of the company with three or more years service (whether continuous
or non-continuous). This means over all the schemes that the
employer offers, more than 75 per cent of Australian resident
permanent employees with three or more years service must be able
to access shares under at least one of those schemes. [Schedule 1,
item 1, subsection 83A-105(2)]
166. Consistent with the current law, this requirement does not apply to
schemes that offer only rights to acquire a share, rather than
shares.
167. While this requirement is to encourage schemes to be available as
widely as possible, the scheme or group of schemes offered by an
employer are only required to be offered to permanent employees
with at least three years service, and only to 75 per cent of those
employees, because it may be difficult in practice to offer the
scheme to all employees including, for example, to casual
employees.
168. The scheme is only required to be offered to 75 per cent of
Australian resident permanent employees to ensure employers with a
significant percentage of foreign employees can offer employee
share schemes to their Australian employees without undue
complexity.
Employee must not have significant ownership or voting rights
169. The interest provided to an employee must not result in the
employee having effective ownership of greater than 5 per cent of
their employer, and not controlling more than 5 per cent of the
maximum voting rights in the employer. [Schedule 1, item 1,
paragraphs 83A-105(1)(b) and (c) and subsection 83A-35(9)]
170. This provision encourages the benefits of the employee share scheme
to be spread widely among employees. The concession is intended to
encourage employees with small or no ownership in their employer to
take up an interest in the company. It is considered that if one
employee owns more than 5 per cent of the voting rights, interests
between the company and that shareholder are already aligned, and
no tax concession is appropriate.
171. Further, this also acts as an integrity rule that prevents
taxpayers from misapplying the concession in order to buy a
business or indirectly access company profits through the employee
share scheme rules. The concession is intended to apply in respect
of the employee/employer relationship and not in relation to the
company/shareholder relationship.
172. The 5 per cent rule is administered on an employee by employee
basis. That is, any individual employee breaching the 5 per cent
rule will make that employee ineligible for deferred taxation, but
have no impact on other employees participating in the scheme.
ESS interests provided through a salary sacrifice scheme
173. The deferral arrangements also allow for shares received at a
discount through a salary sacrifice arrangement to be subject to
deferred taxing treatment, if the salary sacrifice arrangement is
part of the employee's remuneration package, and it is reasonable
to conclude in the circumstances that the salary or wages would be
greater if the shares was not a part of that package. The risk of
forfeiture is not necessary to get deferred taxation treatment
through a salary sacrifice scheme.
174. Providing for deferred tax in the case of employee share schemes
involving salary sacrifice arrangements ensures that certain
employees utilising similar arrangements under the existing law
will continue to be able to access these arrangements with minimal
disruption. This encourages the broad availability of, and
participation in, employee share schemes, and the broad alignment
of the interests of employees and employers in Australia.
ESS interest must be acquired solely under salary sacrifice
arrangements
175. For tax to be deferred under the 'salary sacrifice case', the ESS
interest must be provided:
. because the employee agreed to acquire the interest in
return for a reduction in salary or wages that would not
have happened apart from the agreement; or
. as part of the remuneration package, in circumstances
where it is reasonable to conclude that the employee's
salary or wages would be greater if the interest was not
part of that package.
[Schedule 1, item 1, paragraph 83A-105(4)(a)]
176. This is in line with the current salary sacrifice definition in the
FBTAA 1986.
177. In order for deferred tax treatment to apply the employee must
receive the shares for no consideration. That is, the discount per
share provided through the arrangement must be equal to the market
value of the share. [Schedule 1, item 1, subparagraph 83A-
105(4)(b)(i)]
178. The ESS interests over which tax is deferred under the salary
sacrifice arrangements must be beneficial interests in shares and
not rights. Other ESS interests provided under the scheme, which
are eligible for deferred taxation because they are at real risk of
forfeiture, may be beneficial interests in either shares or rights.
[Schedule 1, item 1, subparagraph 83A-105(4)(b)(ii)]
179. This ensures the employers have the flexibility to provide schemes
with both ESS interests acquired under salary sacrifice
arrangements, and ESS interests at real risk of forfeiture. For
example, an employer may provide a 'matching scheme', where the
employee salary sacrifices remuneration in return for a number of
shares, and the employer offers rights to a matching number of
shares to be provided at a later time, subject to certain
forfeiture conditions being met.
Governing rules of the scheme must state that deferred taxation
applies to the scheme
180. For tax to be deferred under the 'salary sacrifice case', the
governing rules of the scheme must expressly state that the
deferred taxation arrangement applies to the taxation of the
scheme. [Schedule 1, item 1, subparagraph 83A-105(4)(b)(iii)]
181. This requirement is to clearly differentiate the scheme from
similar salary sacrifice schemes where the intent is not to be
subject to the deferred taxation arrangements.
182. A statement in the document offering an employee the opportunity to
participate in the employee share scheme would be sufficient to
fulfil this requirement.
1. : Example of a sentence that could be included in the offer
document
'This scheme is a scheme to which Subdivision 83A-C of the
Income Tax Assessment Act 1997 applies (subject to the
conditions in that Act).'
2. : Matching schemes
Fiona is an employee of Reading Co. For every share that
Fiona purchases under Reading Co's employee share scheme
using salary sacrifice arrangements, Reading Co provides
Fiona with the right to an additional 'matching' share in
two years time, provided that Fiona is still employed by
Reading Co at that time.
Fiona sacrifices $1,000 salary for 100 shares with a market
value of $1,000. If she remains employed with the Reading
Co for two years, she will receive an additional 100 shares
at that time.
The governing rules of the scheme must expressly state that
the deferred taxation arrangement applies to the taxation of
the scheme.
This matching scheme will be eligible for deferral. Fiona's
100 shares are eligible for deferral because they are
provided under eligible salary sacrifice arrangements, and
her 100 'matching' rights are eligible for deferral of tax
under the real risk of forfeiture arrangements.
Fiona will defer tax on her 100 shares and 100 rights until
the 'ESS deferred taxing point' arises. The 'ESS deferred
taxing point' may differ for the 100 shares, and the 100
matching rights.
ESS interests acquired must not exceed $5,000 per annum
183. The total market value of the shares acquired during an income tax
year under a salary sacrifice arrangement must not exceed $5,000,
based on the market value of each interest at the time the interest
is acquired, for a scheme to be eligible for deferred taxation.
[Schedule 1, item 1, paragraph 83A-105(4)(c) and subsection 83A-
105(5)]
184. The $5,000 limit is allowed per employee per employment
relationship. However, employees with more than one employment
relationship within a particular corporate group cannot access the
$5,000 cap twice.
185. The $5,000 limit over shares acquired under salary sacrifice
arrangements does not preclude ESS interests of greater value that
are eligible for deferral of tax under the real risk of forfeiture
arrangements being provided under the same scheme.
1. : $5,000 per employment relationship
During the same tax year, Allan worked in three shops -
Brick Co, Cement Co and Nursing Co. Brick Co and Cement Co
are part of the same corporate group, as they belong to the
same holding company. Allan would be able access deferred
tax treatment for any shares he acquired through a salary
sacrifice arrangement as part of his remuneration package
for $5,000 combined between shops Brick Co and Cement Co,
and a further $5,000 worth from Nursing Co, as it is
unrelated to the holding company for shops Brick Co and
Cement Co.
186. This requirement ensures that deferral of tax under the salary
sacrifice arrangements is limited, providing a relatively more
attractive concession for low and middle income earners.
187. The scheme must also relate to ordinary shares, be part of a
broadly available set of schemes, and no employee must receive
ownership rights greater than 5 per cent, as explained in
paragraphs 1.163 to 1.172. [Schedule 1, item 1, paragraphs 83A-
105(1)(b) and (c)]
188. Tax which is deferred over ESS interests acquired through salary
sacrifice arrangements will be payable at the ESS deferred taxing
point.
The ESS deferred taxing point
189. When tax on an employee share scheme discount is deferred under
either the salary sacrifice or real risk of forfeiture
arrangements, it is deferred until the ESS deferred taxing point
occurs.
ESS deferred taxing point for shares
190. The deferred taxing point for shares is the earliest of the
following possible taxing points:
. there is no real risk that the employee will forfeit the
share, or lose it other than by disposing of it, and there
are no genuine restrictions preventing its disposal; or
. when the employee ceases the employment in respect of
which they acquired the share; or
. seven years after the employee acquired the share.
[Schedule 1, item 1, subsections 83A-115(1), (2 and (4) to (6)]
191. The deferral period is limited by the ESS deferred taxing points to
ensure fairness, continue to align the interests of the employer
and employee, and preserve the integrity of the tax system by
preventing unlimited deferral of tax on employment remuneration.
192. Genuine restrictions preventing disposal could include a condition
of the scheme that contractually prevents disposal of shares. If
disposing of an ESS interest would be a criminal offence, for
example under a law regulating insider trading, then the employee
would also be considered genuinely restricted from disposing of the
share.
193. A company's internal share trading policy is only considered to be
a restriction preventing disposal for the purposes of deferring the
taxing point if the penalty for breaking the policy constitutes an
effective sanction. This means that if there is no legal
prohibition on the disposal of the ESS interest, there must be
serious and enforced consequences for breaching the policy.
194. A restriction that otherwise meets the conditions for a genuine
restriction, but is able to be lifted in cases of severe financial
hardship, is nonetheless considered to be a genuine restriction.
195. Restrictions preventing disposal are considered to be lifted once
an opportunity arises in which a taxpayer can realise the share.
196. In the case of a trading window, or restrictions that may lift and
then re-engage, if the employee does not avail themself of the
opportunity to dispose of the share and the window subsequently
closes, there is no further delay in the taxing point. The taxing
point would still be at the commencement of the first trading
window.
1. : Genuinely restricted
Under an employee share scheme run by Oranges Co, Jack
receives 5,000 shares which are subject to forfeiture in the
event that he leaves employment before five years from time
he acquired the shares. If Jack remains employed for two
years, a pro-rata portion of the shares will no longer be
subject to forfeiture (3,000 vested after three years, 4,000
vested after four years etc) but Jack is prohibited from
selling any of the shares until year five, unless he leaves
employment between years two and five. If Jack leaves
between these times, a portion of the shares will be
available for sale, and a portion will be forfeited.
After two years, Jack is still considered to be genuinely
restricted from selling the shares and continues to defer
tax until the earliest of year five, or when he ceases
employment.
If at the end of year three Jack leaves Oranges Co, he will
be taxed on 3,000 shares at this point, and forfeit 2,000
shares.
If Jack remains employed by Oranges Co for six years, the
taxing point will arise for all the shares at the end of
year five, when the restrictions on selling the shares lift.
2. : Genuinely restricted
Angie is employed by Lime Co, and receives shares in Lime Co
through their employee share scheme. Lime Co has a policy
that employees cannot trade Lime shares for three weeks
prior to Lime Co's annual and half-yearly financial reports
being released.
Lime Co does not enforce this policy.
Angie is not under a genuine restriction as a result of the
policy, and will disregard the policy in determining her
deferred taxing point.
3. : Genuinely restricted
Marceli is employed by Housecoat Co, and receives shares in
Housecoat Co through their employee share scheme. Housecoat
Co has a policy that employees cannot trade Housecoat shares
for three weeks prior to Housecoat Co's annual and half-
yearly financial reports being released. The policy makes
clear that employees found in breach of the policy will have
their employment terminated.
Housecoat Co strictly enforces this policy.
Marceli is under a genuine restriction as a result of the
policy.
4. : Not genuinely restricted
Evelyn is employed by Sprocket Co, and receives shares in
Sprocket Co through their employee share scheme. No
Sprocket employee may trade in Sprocket shares without first
seeking the permission of a manager.
Evelyn is not under a genuine restriction. A genuine
restriction should not be open to manipulation.
5. : Genuinely restricted
Jacqueline is employed by Turboprop Co and receives shares
in Turboprop Co through their employee share scheme.
Jacqueline will forfeit her shares if she ceases employment
with Turboprop in the next two years, and so is under a real
risk of forfeiture.
When entering into the scheme, Turboprop offers Jacqueline a
choice to be restricted from selling her shares for a three,
four or five-year period. She must choose when she enters
the scheme, and her choice will be final.
If Jacqueline chooses the four-year restriction, her
deferred taxing point will occur in four years, or at
cessation of employment.
197. The restriction and conditions covered by the deferred taxing
points are only those that existed when the employee acquired the
ESS interest. Conditions and restrictions that have been added
subsequent to acquisition are ignored for the purposes for
determining the deferred taxing point.
ESS deferred taxing point for rights
198. The deferred taxing point for rights is the earliest of the
following times:
. when the employee ceases the employment in respect of
which they acquired the right;
. seven years after the employee acquired the right;
. when there are no longer any genuine restrictions on the
disposal of right (for example, being sold), and there is
no real risk of the employee forfeiting the right; or
. when there are no longer any genuine restrictions on the
exercise of the right, or resulting share being disposed
of (such as by sale), and there is no real risk of the
employee forfeiting the right or underlying share.
[Schedule 1, item 1, subsections 83A-120(1), (2) and (4) to (7)]
1. : Deferred taxing point
Adrian works for Pear Co, and is granted options to acquire
ordinary shares in Pear Co on the payment of an exercise
price. The options will be forfeited if Adrian ceases
employment with Pear Co within two years from the time of
acquisition, which constitutes a real risk of forfeiture.
The earliest time the options are able to be exercised is
two years from grant. The options cannot be sold or
disposed of, and if the options are exercised, the resulting
shares cannot be sold or disposed of for five years from the
time of acquisition of the options.
Three years later Adrian is still in employment with Pear
Co, exercises his options and acquires shares. At this
point, the scheme still restricts Adrian from disposing of
the shares, and he continues to defer tax.
At five years from grant Adrian is still employed by Pear
Co, and the restrictions on sale of the shares lift. This
will be Adrian's deferred taxing point.
2. : Options which have not had an ESS deferred taxing point before
the lapse
Jessica works for Lemon Co, and is granted non-transferable
options to acquire ordinary shares in Lemon Co on the
payment of an exercise price. The options will be forfeited
if Jessica ceases employment with Lemon Co within three
years from grant, which constitutes a real risk of
forfeiture. The earliest time the options are able to be
exercised is three years from grant. However, the options
are not exercisable unless the Lemon Co share price is at
least equal to the exercise price of the options. The
exercise price is equal to the market value of the Lemon Co
shares at the time of grant of the options. The options
will lapse six years from grant.
Jessica's ESS interests are at real risk of forfeiture, and
the shares meet the conditions of deferred taxation. Tax
would not be payable upfront as the employee would be
subject to a real risk of forfeiting the options. The
options are not exercisable until at year three or some time
thereafter the Lemon Co share price is at least equal to the
exercise price.
Assume that the employee is still employed with Lemon Co
seven years from grant of the options, but that the options
all lapse at year six because the Lemon Co share price
remains below the exercise price at all times between year
three and year six (and therefore the options have never
been exercisable).
As an ESS deferred taxing point has not arisen when the
rights lapse at year six, there would be no amount included
in assessable income under the employee share scheme rules,
and no tax on the lapsed right would be payable.
3. : Multiple restrictions on sale
Jay works for Strawberry Co, and is granted non-transferable
options to acquire ordinary shares in Strawberry Co on the
payment of an exercise price on 1 July 2010.
The options will be forfeited if Jay leaves employment with
Strawberry Co within two years from grant, prior to 1 July
2012. As such, Jay's options are at real risk of forfeiture
and he will defer tax until the ESS deferred taxing point.
The earliest time the options are able to be exercised is 1
July 2012, and the options can be exercised only if both of
the following conditions are also met at that time:
. Jay is in the top 50 per cent of Strawberry Co salespeople
(based on sales volume) over the previous financial year;
and
. Strawberry Co's share price is at least equal to the
exercise price of the options.
Jay is consistently in the top 50 per cent of Strawberry
Co's salespeople. The market price of Strawberry Co shares
exceeds the strike price for the first time on 1 September
2015.
As at 1 September 2015 both conditions are met (for the
first time concurrently), this is Jay's deferred taxing
point. The taxing point will occur regardless of whether or
not Jay chooses to exercise.
199. The current rules for the taxing point for rights are subject to
additional concessionality (by way of a longer deferral period) and
are therefore open to greater abuse from those wishing to
artificially defer the taxing point. Bringing the taxing points
for rights into closer alignment with those for shares will ensure
that taxpayers cannot seek to undermine the integrity changes
proposed to the refund rules.
200. The taxing point is the point at which the taxpayer can take some
action to realise the benefit. It does not matter whether or not
they chose to do so.
30-day rule for the ESS deferred taxing point
201. The ESS deferred taxing point for the ESS interest (an interest in
either a share or a right) is moved to the time the employee
disposes of the interest if they dispose of the interest within 30
days of the original deferred taxing point. [Schedule 1, item 1,
subsections 83A-115(3) and 83A-120(3)]
202. This will make compliance easier by avoiding unnecessary valuation
and the application of multiple taxing regimes within short periods
of time.
Employee share schemes and capital gains tax
203. ESS interests are exempted from CGT events (in most cases) until
the interest has been taxed under the employee share scheme rules.
As the employee share scheme rules are intended to be the primary
taxing regime for ESS interests during the period of deferred
taxation, application of the CGT provisions would potentially
result in double taxation. [Schedule 1, item 40, subsection 130-
75]
204. Once an ESS interest has been taxed under the employee share scheme
rules, it is subsequently taxed consistent with other capital
assets, most likely under the CGT regime, but possible under other
regimes such as the trading stock rules.
205. Certain shares that are not ESS interests provided under an
employee share scheme, but have been acquired by an employee share
trust to satisfy the possible exercise of an ESS interest that is a
right to a share, are also exempted from certain CGT events (see
paragraphs 1.225 to 1.228).
206. Further, to ensure employees participating in employee share
schemes are taxed consistently regardless whether or not the scheme
utilises a trust structure, special provisions are included
relating to employee share trusts.
Disregard most CGT events during the period of deferred taxation
207. The new law continues to exempt ESS interests from tax under the
CGT provisions until the ESS interest has been taxed under the
employee share scheme tax rules. An exception is made in the case
of certain CGT events that primarily affect the cost base of the
ESS interest, which apply throughout the life of the ESS interest.
[Schedule 1, item 40, subsection 130-80(1)]
208. Ensuring that these CGT events which affect the cost base of the
ESS interest continue to operate, those involving a return of
capital to the employee or value shifting (CGT events E4, G1 and
K8), results in a fair tax treatment. If these events did not
operate to adjust the cost base of the ESS interest and the related
share or right, capital gains returned to the employee as capital
payments would not be taxed.
CGT treatment of an ESS interest after taxing point
209. Once an ESS interest has been taxed under the employee share scheme
rules, it is subsequently taxed consistent with other capital
assets, most likely under the CGT regime, but possible under other
regimes such as the trading stock rules.
210. To ensure that CGT applies fairly and double taxation is avoided,
the employee share scheme rules consider ESS interests to be
(re)acquired for their market value immediately after the point
they are taxed under the employee share scheme rules.
211. That is, for ESS interests that are taxed upfront, the interest
(and the share or right of which it forms part) is taken to have
been acquired for its market value from the point at which the
taxpayer initially acquired the ESS interest [Schedule 1, item 1,
section 83A-30]. For ESS interests over which tax is deferred, the
ESS interest (and the share or right of which it forms part) is
taken to have been reacquired immediately after the ESS deferred
taxing point [Schedule 1, item 1, section 83A-125]. This resets
the cost base of the ESS interest to market value, and resets the
acquisition time, which may be relevant to an employee's
eligibility for the CGT discount.
212. Once an ESS interest has been taxed under the employee share scheme
rules, and the interest is taken to have been (re)acquired at its
market value, it is most likely that the CGT regime will tax any
subsequent gains.
1. : Upfront tax
Robyn acquires ESS interests in her employer, Chessboard Co,
for $300 under an employee share scheme. The interests have
a market value of $600, so Robyn acquired the interests at a
$300 discount. The scheme is subject to upfront taxation,
and Robyn is not eligible for the upfront discount, so Robyn
will include $300 in her assessable income under the
employee share scheme rules.
Robyn is taken to have acquired her ESS interests at market
value for purposes other than the employee share scheme
rules, and the cost base at that time is reset to $600 (at
the time of upfront taxation which is also the time the
asset is acquired).
Any subsequent gains or losses will be recognised under the
CGT regime.
2. : Deferred tax over shares
Annette acquires shares in her employer, Petal Co, for $200
under an employee share scheme. The shares have a market
value of $300, so Annette acquired the shares at a $100
discount to their market value.
As the scheme Annette participates in meets the conditions
for deferral of tax, she must defer until the ESS deferred
taxing point occurs. While tax is deferred, any CGT events
are disregarded (with the exception of certain events that
may have an impact on the cost base).
Four years after she acquired the shares Annette ceases
employment with her employer, triggering the deferred taxing
point. The ESS interests now have a market value of $400.
The employee share scheme tax rules require her to include
the value of the discount and subsequent market gains
(current market value less the cost base) in her assessable
income ($200). This amount will be taxed at Annette's
marginal tax rate.
At this point the shares are taken to have been reacquired.
The shares will now have a cost base of $400.
Because the shares are taken to be reacquired, if Annette
chose to dispose of them within 12 months of the ESS
deferred taxing point occurring, she would not be able to
apply the CGT discount.
However, in this example she chooses to sell the shares
(originally acquired under the employee share scheme) two
years after the ESS deferred taxing point has occurred, at
the market value of $600. Annette will pay tax on the $600
less the cost base of $400 (a capital gain of $200). She
will be able to apply the 50 per cent CGT discount,
therefore including $100 in her assessable income (assuming
she has no capital losses to apply).
If the shares' cost base had not been reset to their market
value at the deferred taxation point, Annette would instead
have had a capital gain of $400 and have faced double
taxation on the first $200 of the gain.
3. : Deferred tax over rights
Tom acquires rights to shares in his employer, Nibbler Co,
for $100. The rights have a market value of $400 under an
employee share scheme, so Tom acquired the rights at a $300
discount to their market value. The ESS interests are
rights to acquire shares in Tom's employer.
The scheme Tom participates in meets the conditions for
deferral of tax, so he must defer tax until the ESS deferred
taxing point occurs. While tax is deferred, any CGT events
are disregarded (with the exception of certain events that
primarily have an impact on the cost base).
Six months after he acquires the rights, they are no longer
under any real risk of forfeiture, and Tom is under no
genuine restriction which is preventing him from exercising
the rights and disposing of the underlying shares. The
market value at that time is $500. This triggers the ESS
deferred taxing point. The employee share scheme tax rules
require Tom to include the value of the discount and
subsequent market gains (current market value less the cost
base) in his assessable income ($400). This will be taxed
at Tom's marginal tax rate.
At this point the ESS interest is taken to have been
reacquired. The asset will now have a cost base of $500
(the market value when the ESS deferred taxing point
occurred).
Because the asset is taken to be reacquired, if Tom chose to
dispose of or exercise the rights within 12 months of the
ESS deferred taxing point occurring, he would not be able to
apply the CGT discount.
Nine months after the ESS deferred taxing point occurred,
Tom exercises the rights, and acquires shares. This
triggers a CGT event.
However, the general CGT rules which apply when options are
exercised mean that:
. any capital gain or loss made on the exercise of the options
is disregarded;
. the cost base of the shares will be taken to be the cost
base of the previous rights plus the strike price; and
. the CGT acquisition date will be reset, and Tom will not be
able to apply the CGT discount in relation to the shares for
a further 12 months.
(See the rollover provisions in Division 134 of the ITAA
1997)
In this example, the rights have a strike price of $1,000,
so the shares will have a cost base of $1,500.
Nine months after Tom exercised the rights and acquired
shares, he sells the shares at their market value of $2,000.
Tom will pay tax on the $2,000 less the cost base of
$1,500. Because it is less than 12 months since the
previous CGT event (when he exercised the rights) Tom may
not apply the CGT discount.
1. : Diagrammatic representation of Example 1.35
[pic]
213. The employee share scheme rules and the CGT regime are based around
different concepts. The employee share scheme rules tax ESS
interests (beneficial interests in shares or rights), whilst the
CGT regime refers to CGT assets and CGT events that are primarily
based on ownership of the share or right itself.
214. The new law includes a specific provision to ensure that an
appropriate link is established between the concepts used in each
of the regimes. [Schedule 1, item 40, section 130-95]
CGT and employee share trusts
215. The provisions relating to the CGT regime and trusts are restricted
to employee share trusts (as opposed to other trusts) for reasons
of integrity. Other trusts are more appropriately treated as
associates of the employee.
216. An employee share trust is a trust which obtains employee share
scheme interests in a company, and provides them on behalf of
employers to employees of that company or their associates, or
carries out activities incidental to the holding and providing of
ESS interests (for example, bookkeeping, passing on dividends or
opening and closing employee accounts). [Schedule 1, item 40,
subsection 130-85(4)]
217. The employee share scheme rules aim to tax employees participating
in employee share schemes consistently, regardless of whether the
employees immediately receive legal title to the ESS interests, or
the scheme utilises a trust structure.
218. To achieve this, the new employee share scheme rules treat an
employee who acquires an ESS interest through an employee share
trust to be absolutely entitled to the share or right to which the
ESS interest relates from the time that they acquire the ESS
interest, if the employee share scheme rules apply to the interest.
[Schedule 1, item 40, subsections 130-85(1) and (2)]
219. This mechanism simplifies the taxation of employees who hold ESS
interests in an employee share trust and ensures a consistent
treatment of the cost base of the ESS interest with employees who
hold legal title to the interest.
220. Under the CGT regime, if a beneficiary of a trust is absolutely
entitled to an asset of the trust, the beneficiary is taxed in
relation to any gain or loss relating to the interest (not the
trustee). Some background to the meaning of 'absolutely entitled'
is contained in draft taxation ruling TR 2004/D25.
221. Treating an employee as fully entitled to a share or right ensures
that CGT applies only to the employee and not to the employee share
trust from the point that the share or right is acquired under an
employee share scheme. The effect of the provision is to ignore
the existence of the employee share trust for CGT purposes.
222. By bringing forward the absolute entitlement to the relevant share
or right, CGT event E5 (becoming fully entitled to a trust asset)
is brought forward to the employee's acquisition time. The
employee share trust will be taxed on any gains to date, and all
subsequent tax liabilities under either the employee share scheme
rules or the CGT regime will accrue to the employee.
223. Taxing the employee share trust at the time the employee acquires
the ESS interest under the scheme is appropriate, as the trust may
have been holding unallocated ESS interests for a period of time,
and those capital gains will be taxed under the CGT regime
consistent with the normal application of the CGT regime.
1. : CGT and employee share trusts
Coolant Co operates an employee share scheme utilising an
employee share trust. Coolant Co issues 100 Coolant Co
shares with a market value of $500 into the employee share
trust.
Three months later Coolant Co provides its employee,
Rebecca, with ESS interests in 100 Coolant Co shares in the
employee share trust for no cost to Rebecca. The shares now
have a market value of $550, and Rebecca is treated as being
absolutely entitled to these shares. Rebecca's scheme is
not eligible for deferred tax, and she will be taxed
upfront, and she is not eligible for the upfront concession.
Rebecca becoming absolutely entitled to the shares triggers
CGT event E5, resulting in the trustee of the employee share
trust being taxed on the $50 of accrued capital gain in the
shares.
Rebecca will include the value of the discount in her
assessable income, that is, $550.
Any further gains or losses on these shares will be
recognised as belonging to Rebecca under the CGT regime
(unless Rebecca forfeits the shares and is eligible for a
refund of tax).
224. Treating the employee as absolutely entitled to the underlying
share or right from the point that they acquire an ESS interest
ensures that they will be taxed consistently with an employee who
acquired legal title to the relevant share or right at the time
they acquired the ESS interest.
Shares held to satisfy issued rights to shares
225. Capital gains or losses are disregarded for certain CGT events that
occur in relation to shares acquired by an employee share trust to
satisfy the future exercise a right to a share provided under an
employee share scheme. The CGT events for which the gains or
losses are disregarded are E5 - beneficiary becoming entitled to a
trust asset, and E7 - disposal to a beneficiary to end capital
interest. [Schedule 1, item 40, subsection 130-90(1)]
226. Although the shares are acquired by the trust in relation to
employee share schemes, they are not provided under an employee
share scheme and so will not be subject to the employee share
scheme rules. They are primarily subject to the CGT regime.
227. Capital gains or losses on these shares are disregarded in
recognition that the gains are already embedded in the value of the
right to the share (in which the employee has a beneficial interest
that will be taxed under the employee share scheme rules). These
provisions ensure that the gain will only be taxed once.
228. Consistent with the current law, the gains or losses will not be
disregarded if the employee acquires the share for more than its
cost base in the hands of the employee share trust. This is to
ensure that there are no untaxed capital gains in the share which
are not embedded (and taxed) in the value of the right to the
share. [Schedule 1, item 40, subsection 130-90(2)]
1. : Shares held to satisfy issued rights to shares
Packsaddle Co operates an employee share scheme, and
provides rights to Packsaddle shares to its employees which
will become exercisable in two years time. Packsaddle Co's
employee share trust acquires shares in anticipation of the
possible exercise of these rights.
In two years time, a number of these rights are exercised,
and the employee share trust provides the shares to the
employee. If this results in CGT event E5 or E7 occurring,
any gains or losses on the shares are disregarded in the
hands of the trustee (provided that the employee acquires
the share for less than its cost base in the hands of the
employee share trust).
CGT, employee share trusts and the refund provisions
229. An employee who acquires ESS interests under an employee share
scheme through an employee share trust is deemed to be absolutely
entitled to the interest by operation of the employee share scheme
rules from the date of acquisition of the ESS interest.
230. If an employee is entitled to a refund of tax under the employee
share scheme rules, the refund provisions undo any previous
application of the employee share scheme rules. That is, the
employee share scheme rules are taken never to have applied (see
paragraphs 1.325 to 1.336).
231. If the employee share scheme rules never applied, the employee may
not be absolutely entitled to ESS interests over which they were
previously treated as having been absolutely entitled to (by
operation of the provisions described in paragraphs 1.217 to
1.224).
232. Previous income tax assessments of the employee and the employee
share trust may need to be amended to reflect this.
233. If an ESS interest is forfeited, the CGT integrity provision that
substitutes market value when the disposal or cancellation of an
asset results in no capital proceeds will not apply. [Schedule 1,
item 40, subsection 130-80(4)]
234. This provision would not be appropriate because there are
legitimate circumstances in which an ESS interest may be forfeited,
resulting in no capital proceeds.
235. The rule that instructs the taxpayer to disregard most CGT events
in relation to an ESS interest until it has been taxed under the
employee share scheme tax rules does not apply if those interests
are forfeited. This ensures that an employee who pays money to
acquire ESS interests will receive a capital loss in respect of
this payment if they subsequently forfeit those ESS interests, or
lose them other than by disposing of them. [Schedule 1, item 40,
subsection 130-80(2)]
236. The market value substitution rule is turned off when ESS interests
are forfeited for the same reason. [Schedule 1, item 40,
subsection 130-80(4)]
CGT - Miscellaneous
237. The new employee share scheme rules continue to treat employee
share scheme interests provided to associates of employees in
relation to an employee's employment as though the interest was in
fact acquired by the employee rather than the associate.
238. This provision also applies for the purposes of exempting the ESS
interests from CGT events during the period of deferred taxation
(with certain exceptions).
239. An employee will also be considered absolutely entitled to the
relevant share or right if an associate of the employee acquires an
ESS interest, related to the employee's employment, through an
employee share trust (see paragraphs 1.267 to 1.274 for further
discussion of associates). [Schedule 1, item 40, paragraph 130-
100(b)]
240. After employee is taxed under the employee share scheme rules, the
associate is considered absolutely entitled to the relevant ESS
interests. The CGT regime will recognise any further gains or
losses as belonging to the associate. In other words, the employee
is no longer treated to have the ESS interests of the associate.
[Schedule 1, item 40, subsection 130-85(3)]
241. An employee may be treated as absolutely entitled to an interest in
an employee share trust, even if that interest does not correspond
to particular shares (see paragraphs 1.277 to 1.279). [Schedule 1,
item 40, paragraph 130-100(c)]
242. The employee share scheme rules relating to takeovers and
restructures (see paragraphs 1.244 to 1.265), relationships similar
to employment (see paragraphs 1.373 to 1.375), stapled securities
(see paragraphs 1.377 to 1.382) and indeterminate rights (see
paragraphs 1.367 to 1.372) are applicable to interests provided
through an employee share trust. [Schedule 1, item 40,
paragraphs 130-100(a) and (d) to (f)]
243. The CGT acquisition rule that considers a taxpayer to have acquired
a share or right from the time the contract is entered into, is
turned off for shares or rights that an employee has an ESS
interest in. This ensures that the acquisition dates under the CGT
regime and the employee share scheme rules are aligned. [Schedule
1, item 40, subsection 130-80(3)]
Takeovers and restructures
244. The employee share scheme rules ensure that employees are not
adversely affected by takeovers and restructures, by allowing
taxpayers who have deferred tax under an employee share scheme to
roll-over an ESS deferred taxing point that would otherwise occur
due to a corporate restructure.
245. Since there are situations where employees may defer their income
tax liability arising from a discount on shares or rights, a
corporate restructure may give rise to a deferred taxing point by
triggering a disposal of the shares or rights or by breaking the
employment relationship between an employee and the company that
originally granted the shares or rights. This would not be the
intended outcome.
246. The new rules ensure this is not the case by allowing the employee
share scheme rules to still apply if an arrangement is entered into
that results in the original company becoming the subsidiary of
another company, or if there is a change in the ownership of the
existing company that results in any ESS interests in the old
company being replaced, whole or partly, by ESS interests in one or
more other companies. [Schedule 1, item 1, subsection 83A-130(1)]
247. The roll-over relief will not apply to deferred taxing points that
occur outside of corporate restructures.
248. A taxing point will still arise when an employee's employment
ceases with the employer, when the disposal restrictions expire, or
the seven year maximum deferral period occurs, whichever event
happens first.
249. The provision of roll-over relief for corporate takeovers and
restructures was explained in detail in the explanatory memorandum
to the Tax Laws Amendment (2004 Measures No. 7) Bill 2004. There
have been no policy changes to the operation of those rules.
Treat new interests as continuations of old interests
250. The interests in the new company that are acquired in connection
with the takeover or restructure are treated as a continuation of
the original ESS interests. This only applies to the extent that
as a result of the arrangement or change, the employee stops
holding the old interests and the new interests can reasonably be
regarded as matching any of the old interests. The new interests
must be ordinary shares or rights over ordinary shares. [Schedule
1, item 1, subsections 83A-130(2) and (4)]
251. Matching shares or rights are the replacement shares or rights
provided to put the employee in the same position financially after
the corporate restructure as before it. Matching shares or rights
should be no more than that which is required to place the employee
in the same position financially as if the restructure had not
occurred.
252. The relief is limited to matching shares so that the taxpayer does
not receive any additional benefit as a result of the restructure
than he or she would otherwise have received.
253. It must be possible to identify the shares or rights that the
employee holds as a result of the restructure and they must
reasonably match the employee's original holding of shares or
rights immediately before the restructure.
254. While the taxpayer should not receive any additional benefit, there
need not be a one-to-one ratio between the old and the new shares
or rights in order for them to be matching, provided that the value
of the new shares or rights relative to the old shares or rights
remains unchanged.
255. To be regarded as reasonably matching, the attributes of the shares
or rights immediately before the restructure need to be the same,
or substantially the same, immediately after the restructure.
Attributes include whether it is a share or a right. The
replacement of shares for rights, or vice versa, following a
restructure would not qualify for roll-over relief as the essential
characteristic of the employee's interests (shares or rights)
provided after the restructure would have substantially changed.
256. The tax treatment of non-matching shares or rights immediately
after a corporate restructure will be determined on the basis of
the application of the base employee share scheme rules and will
depend on the circumstances in each case.
257. A deferred taxing point will arise to the extent that the old
shares or rights are replaced by cash that is matching, as roll-
over relief only applies to matching shares or rights that are
treated as a continuation of the shares or rights in the old
company.
1. : Sale of subsidiary and employment relationships
Jeans Co is a wholly owned subsidiary of Clothing Co. The
employees of both Clothing Co and Jeans Co have access to
the employee share scheme run by Clothing Co. Clothing Co
decides to sell off Jeans Co, and in anticipation of the
sale, transfers some Clothing Co employees to Jeans Co, and
some Jeans Co employees to Clothing Co.
Upon sale of Jeans Co by Clothing Co, the following would
occur:
. employees of Clothing Co who have always worked for
Clothing Co will have no cessation of employment;
. employees of Clothing Co who were originally employed by
Jeans Co when they took part in the employee share scheme
will have a cessation of employment;
. employees of Jeans Co who were always employed in Jeans Co
will have no cessation of employment; and
. employees of Jeans Co who were employed by Clothing Co when
they first took part in the employee share scheme will have
a cessation of employment.
This is the same outcome as under the current law.
258. Where a taxpayer holds shares or rights in the old company that
were acquired at different times, the matching shares or rights are
also held to be acquired at those different times. The seven-year
maximum deferral period will continue to run from the date the
original shares or rights were acquired.
259. In 100 per cent takeover and restructure situations, the three-year
minimum holding period for eligibility for the upfront concession
is considered to have been met. [Schedule 1, item 1, subsection
83A-130(3)]
260. If this were not the case, the disposal of old ESS interests at the
point of takeover or restructure, albeit replaced by new ESS
interests, may be regarded as a breach of the three-year minimum
holding period and result in an employee's eligibility for the
upfront concession being retrospectively amended by the
Commissioner (see paragraphs 1.129 to 1.132 for the minimum holding
period).
Old interest not matched by new interests
261. The old interests can be considered to have been disposed of (in
connection with the takeover or restructure) if they can reasonably
be regarded as matching any of the old interests but do not meet
the criteria to be considered a continuation of those interests.
[Schedule 1, item 1, subsection 83A-130(5)]
262. Employment in the new company, a subsidiary of the new company; a
holding company (within the meaning of the Corporations Act 2001)
of the new company; or a subsidiary of a holding company of the new
company is to be treated as a continuation of the employment in
respect of which the old interests were acquired. [Schedule 1,
item 1, subsection 83A-130(6)]
263. The employee must continue be employed (within the meaning given
above) at or about the time the new interest are acquired for the
takeover and restructure rules to apply. [Schedule 1, item 1,
paragraph 83A-130(9)(a)]
Apportionment of cost base of old interests
264. Any consideration the employee paid for the ESS interests will be
spread among the matching ESS interests in proportion to their
market values immediately after the corporate restructure. This
allows the calculation of the discount that is to be brought to tax
to be calculated for those ESS interests that will not be subject
to the roll-over and those that will. [Schedule 1, item 1,
subsections 83A-130(7) and (8)]
265. This only applies to employees who, at the time they acquire the
new interests, do not hold a beneficial interest in more than
5 per cent of the shares in the new company, and are not in a
position to cast more than 5 per cent of the maximum number of
votes that could be cast at a general meeting of the new company.
[Schedule 1, item 1, subparagraphs 83A-130(9)(b)(i) and (ii)]
Protecting the integrity of employee share schemes
266. The employee share scheme tax law is designed to ensure the
integrity of the taxation of employee share schemes. The new law
reproduces a number of integrity provisions in the current law and
introduces a number of new integrity provisions.
Interests provided to associates
267. The new law continues to treat employee share scheme interests
provided to associates of employees, in relation to an employee's
employment, as though the interest was in fact acquired by the
employee rather than the associate. [Schedule 1, item 1,
section 83A-305]
268. This provision is designed to ensure that arrangements are not
artificially constructed to avoid the employee share scheme tax
rules, or to lessen a tax liability incurred in relation to ESS
interests, by providing benefits to associates of an employee.
269. The definition of 'associate' aligns with the broad definition used
across the tax law (see section 318 of the ITAA 1936).
270. The employee share scheme arrangements expressly exclude an
employee share trust from being considered an associate of an
employee. [Schedule 1, item 1, section 83A-305]
271. The employee share scheme rules tax employees who have a beneficial
interest in an employee share trust as though they were the legal
owners of those shares. Disregarding the employee share trusts
under the associates provision ensures that the various employee
share scheme rules do not inappropriately apply to the employee
share trust. For further discussion on the treatment of trusts,
see paragraphs 1.275 to 1.280.
272. If an employee share trust were not disregarded as an associate,
potentially every employee would be taxed on every interest in the
trust, as the trust would be an associate of the employees.
273. Unlike the old law, which always taxed the employee upfront for
shares provided to an associate, the new law allows for deferral if
the employee share scheme meets the criteria.
274. At the taxing point, when the shares move into the CGT system, any
further capital gain or loss incurred in relation to the shares is
borne by the associate. This is the same as under the current law.
Interests in a trust
275. The new law is designed to ensure that employees with a beneficial
interest in shares in an employee share trust will be taxed as
though they were the legal owners of those shares. This is so that
employees cannot lessen, delay or avoid their tax liability by
interposing a trust.
276. An ESS interest is defined as a beneficial interest so that an
individual pays tax on shares or rights that they are receiving
economic benefit from, regardless of whether they are also the
legal owner of the shares or rights, or whether those shares or
rights are held in a contractual or trust relationship for them.
[Schedule 1, item 1, subsection 83A-10(1)]
277. Further, to overcome trust law restrictions on identifying assets
for which an employee holds a beneficial interest when they are
held within a single pool of unidentifiable assets in a trust, the
new law treats particular shares or rights to acquire shares in a
trust as though they were beneficially owned by particular
employees. [Schedule 1, item 1, subsections 83A-320(1), (2) and
(4)]
278. In the case where a trust holds multiple classes of assets, the
rules are applied separately to each class of assets. [Schedule 1,
item 1, subsection 83A-320(3)]
279. These rules apply to both Australian trusts and to foreign entities
that are treated in a consistent manner to Australian trusts.
Entities that have similar characteristics to employee share scheme
trusts but are treated in a manner more consistent with a different
Australian entity are not covered by these rules.
280. These provisions relating to trusts are restricted to employee
share trusts (as opposed to other trusts) for reasons of integrity.
If trusts that are not an employee share trust are utilised, the
trust may be an associate of the employee, resulting in the
employee being taxed on all the ESS interests in the trust.
Employer reporting
281. The new law requires employers who provide ESS interests to report
certain information to the Commissioner, to enable the Commissioner
to ensure that the employee share scheme rules are being complied
with. [Schedule 1, item 5, section 392-1 in Schedule 1 to the TAA
1953]
282. An employer who provides ESS interests to an employee during a year
must, at the end of the year, and in certain cases at the end of a
later year, report to the Commissioner and to the employee.
283. These reporting requirements boost the integrity of the taxation of
share schemes, addressing concerns that the current employee share
scheme rules are not being complied with and that the Commissioner
is in a position to know the full extent of that non compliance.
The reporting requirements will provide the Commissioner with the
information to conduct data matching activities and ensure that
employees comply with the rules.
284. The reporting requirements also allow the Commissioner to pre-fill
tax returns to assist employees with their tax obligations.
285. Specifically, the rules require that the provider of the ESS
interests is the entity required to report. Whether the provider
of an ESS interest is the employee's employer, or a holding company
of the employer, will depend on the circumstances of the case.
1. : Employee share trust is not the provider
Lee works for Party Co. Party Co has an employee share
scheme which provides Lee with ESS interests through an
employee share trust. Party Co is the provider, and is the
entity required to report.
2. : Holding company may be the provider
Emma works for Disco Co, which is fully owned by Dance Co.
Dance Co operates an employee share scheme for employees of
all its subsidiary companies, and directly offers Emma
shares in Dance Co through an employee share scheme. Dance
Co is the provider.
3. : Subsidiary employer may be the provider
Alyse works for Sushi Co, a subsidiary of Japanese Food Co.
Sushi Co operates an employee share scheme which offers its
employees ESS interests in Japanese Food Co. Sushi Co is
the provider.
4. : Share registry or other agent of the employer or holding company
is not the provider
Anna works for BBQ Co, and participates in BBQ Co's employee
share scheme. BBQ Co contracts Share Registry Co to
distribute Anna's ESS interests to her. BBQ Co is the
provider.
286. In practice however, a provider may use an agent to fulfil the
reporting requirements on their behalf.
1. : Use of an agent
Garden Co is a multinational corporation, with an Australian
subsidiary company, Flower Co. Garden Co operates an
employee share scheme, and offers shares in itself to
employees of Flower Co through the scheme.
Garden Co is the provider, but it may use Flower Co as an
agent to fulfil its reporting obligations.
287. A provider must give a statement to the Commissioner and to the
employee if:
. the provider provided interests to the employee during the
year which were taxed under the employee share scheme tax
rules; or
. the provider has provided deferred tax interests to the
employee (during that income year or a previous income
year), and the ESS deferred taxing point for the interests
occurred during the year.
[Schedule 1, item 5, subsection 392-5(1) in Schedule 1 to the TAA
1953]
288. An administrative penalty applies to providers who fail to provide
this statement. [Schedule 1, item 80, subsection 286-75(2BA) in
Schedule 1 to the TAA 1953]
289. The statement must be provided in a form approved by the
Commissioner, containing any required information or signed
declarations, and provided to the Commissioner in the required
manner. [Schedule 1, item 5, subsection 392-5(2) in Schedule 1 to
the TAA 1953]
290. The legislation outlines some of the particular information that
the Commissioner may require in the approved form. This is
provided to better illustrate the intent of the employer reporting
requirements, and to provide some guidance to employers and
employees as to the sort of information the Commissioner might
require. [Schedule 1, item 5, subsection 392-5(3) in Schedule 1 to
the TAA 1953]
291. The legislative guidance that is provided on what the Commissioner
may require in the approved form does not in any way limit the
information that the Commissioner may or may not require.
[Schedule 1, item 5, subsection 392-5(4) in Schedule 1 to the TAA
1953]
292. The required statements must be given by the provider to the
employee no later than 14 July after the end of the year; and to
the Commissioner no later than 14 August after the end of the year.
If the employer is unable to meet the deadline the Commissioner
may defer the deadlines under the general machinery provisions.
The year is the financial year in which the ESS deferred taxing
point for the ESS interest occurs. [Schedule 1, item 5,
subsections 392-5(5) and (7) in Schedule 1 to the TAA 1953]
293. The provider may disregard the 30-day rule for the ESS deferred
taxing point (see paragraphs 1.201 to 1.202) for reporting
purposes, if they are not aware when or whether the employee
disposed of the ESS interest within 30 days of the ESS deferred
taxing point. [Schedule 1, item 5, subsection 392-5(6) in Schedule
1 to the TAA 1953]
294. If, after providing the statement, the provider becomes aware of
any information that has materially changed or been omitted in the
statement, within 30 days of becoming aware of the change or
omission they must either inform the employee and the Commissioner;
or provide the omitted information to the employee and the
Commissioner. [Schedule 1, item 5, section 392-10 in Schedule 1 to
the TAA 1953]
295. The reporting requirements will apply to all ESS interests which
are provided after 1 July 2009 and taxed upfront, or any ESS
interest on which tax is deferred and relevant ESS deferred taxing
point occurs after 1 July 2009. This includes ESS interests which
may have been acquired under the current provisions in Division 13A
of the ITAA 1936 (see paragraphs 1.391 to 1.422 for the
transitional arrangements).
296. If the provider is an Australian parent company that has provided
interests to foreign resident employees of a foreign subsidiary,
and the employment is not considered to be Australian sourced
income, then there will be no inclusion of the discount in the
employee's assessable income, and no reporting requirement arises.
297. The employee share scheme rules relating to takeovers and
restructures, discounted shares or rights acquired by associates,
market values and discounts, trusts, relationships similar to
employment, to stapled securities, and to indeterminate rights also
apply for the purposes of employer reporting requirements.
[Schedule 1, item 5, section 392-15 in Schedule 1 to the TAA 1953]
TFN withholding tax (ESS)
298. The new law introduces a withholding tax, applicable in limited
circumstances, to ensure the integrity of the taxation of employee
share schemes.
299. The 'TFN withholding tax (ESS)' is defined in the TAA 1953, and is
hereafter referred to as the withholding tax.
300. The withholding tax is payable if an employer provides discounted
shares and rights to an employee, and that employee has not quoted
their TFN, or their ABN to the employer by the end of the income
year. [Schedule 1, item 2, subsections 14-155(1) and (3) in
Schedule 1 to the TAA 1953, and clause 3 of the Income Tax (TFN
Withholding Tax (ESS)) Bill 2009]
301. An employee refusing to provide their employer with a TFN or ABN
(as the case requires) undermines the new law relating to employer
reporting requirements, which are important to ensuring the
integrity of employee share scheme taxation.
302. If the employer does not report a TFN or ABN, the Commissioner will
not easily be able to identify the employee to whom the discounted
shares or rights have been provided (to ensure the correct tax is
paid). Imposing a withholding tax in these cases will ensure that
tax is in fact paid. The withholding tax is imposed in the income
year that the employee would be liable to pay tax over the ESS
assets.
303. It is rare for an employee to refuse to provide their employer with
a TFN, so the withholding tax will not be commonly levied.
304. When the employer is a subsidiary of the provider of the employee
share scheme, the employer may provide the employee's TFN to the
provider, if the employee has provided their TFN number to the
employer. [Schedule 1, item 2, section 14-160 in Schedule 1 to the
TAA 1953]
305. This rule makes the withholding tax requirements easier to comply
with.
306. The withholding tax is payable on the amount of employee share
scheme discount included in an employee's assessable income for an
income year under the general employee share scheme tax rules.
[Clause 3 of the Income Tax (TFN Withholding Tax (ESS)) Bill 2009]
307. The employer may disregard the 30-day rule for the ESS deferred
taxing point (see paragraphs 1.201 to 1.202) when determining
whether any withholding tax is payable in an income year, if they
are not aware when or whether the employee disposed of the ESS
interest within 30 days of the ESS deferred taxing point.
[Schedule 1, item 5, subsection 392-5(6) in Schedule 1 to the TAA
1953]
308. The rate of withholding tax is calculated by adding the highest
individual marginal tax rate to the rate of the Medicare levy.
This rate ensures that high income individuals cannot pay less tax
by withholding their TFN or ABN from their employer. [Clause 4 of
the Income Tax (TFN Withholding Tax (ESS)) Bill 2009]
309. For the purposes of the withholding tax, any upfront concession
that may be available to the employee (reducing the amount of
discount that is included in their assessable income) is
disregarded. [Schedule 1, item 2, subsection 14-155(2) in Schedule
1 to the TAA 1953]
310. This is because an employer who incurs withholding tax may not know
whether or not the relevant employee meets the income test for the
upfront concession.
311. Withholding tax is payable 21 days after the end of the income year
in which the ESS interest is included in the employee's assessable
income. This will be the year that the shares or rights were
provided in the case of upfront taxation schemes, or the year of
the ESS deferred taxing point for deferred tax schemes. [Schedule
1, item 2, subsection 14-155(4) in Schedule 1 to the TAA 1953]
312. When withholding tax is levied on an employer, they can recover the
amount of withholding tax that they have paid from the employee to
whom the amount of tax relates. The employer can do this by
offsetting the amount they can recover from the employee against an
amount they otherwise owed the employee, such as the employee's
salary. [Schedule 1, item 2, section 14-165 in Schedule 1 to the
TAA 1953]
313. Allowing the employer to recover the amount of withholding tax as a
debt from the employee will mean that the tax is actually borne by
the employee. This is appropriate as it is the employee who has
the beneficial interest in the shares or rights, and the employee
who will receive a tax credit for any withholding tax paid.
314. When calculating an employee's tax payable for an income year, the
employee is given a credit for any withholding tax that has been
paid by their employer in relation to them. [Schedule 1, item 2,
section 14-170 in Schedule 1 to the TAA 1953]
315. The withholding tax will generally result in the same financial
outcome for the employer or the employee than they would otherwise
have received had the employee provided their TFN or ABN. When
withholding is levied:
. the employer will be able to recover a debt equal to any
withholding tax paid from the employee; and
. the employee will receive a tax credit for withholding tax
paid, which will be applied when the Commissioner makes
their income tax assessment for the income year.
316. If there is an overpayment of withholding tax by the employer, the
Commissioner must refund the amount that has been overpaid to the
employer, and the relevant employee will not receive a tax credit
for that amount (nor will they have to pay any amount to the
employer as a debt). [Schedule 1, item 2, section 14-175 in
Schedule 1 to the TAA 1953]
317. The employee share scheme rules relating to takeovers and
restructures, discounted shares or rights acquired by associates,
trusts, relationships similar to employment, to stapled securities,
and to indeterminate rights also apply to the withholding tax.
[Schedule 1, item 2, section 14-180 in Schedule 1 to the TAA 1953]
318. Any withholding tax must be paid by a method provided for under the
general machinery rules of the TAA 1953, and any amount of
withholding tax that is not paid by the due date will result in the
employer being liable for the general interest charge on the unpaid
amount. [Schedule 1, items 3 and 4, subsection 16-70(3) and
section 16-80 in Schedule 1 to the TAA 1953]
1. : Operation of the TFN withholding tax (ESS)
Georgina is an employee of Ginger Bank in the 2009-10 income
year. Ginger Bank operates an employee share scheme, and
has provided Georgina with shares in Ginger Bank under an
employee share scheme at a $100 discount to their market
value. Ginger Bank's employee share scheme is an upfront
taxation scheme. However, Georgina has not quoted her TFN
to Ginger Bank by the end of the income year.
As a result, Ginger Bank is liable for withholding tax.
Ginger Bank must pay this to the Commissioner no later than
21 days after the end of the income year.
The rate of the withholding tax will be 46.5 per cent in the
2009-10 income year.
Multiplying the discount Georgina received by the rate of
the withholding tax will give Ginger Bank's withholding tax
liability, so Ginger Bank must pay $46.50 to the
Commissioner.
Ginger Bank may then recover $46.50 from Georgina as a debt.
In this case, Ginger Bank and Georgina agree that $46.50
will be deducted from her salary.
When the Commissioner makes Georgina's income tax assessment
for the 2009-10 income year, she will receive a tax credit
of $46.50 in recognition of the withholding tax payed by
Ginger Bank. Of course, the $100 discount she received
through Ginger Bank's employee share scheme will be included
in her assessable income.
In the end, Ginger Bank is no worse off, as they paid $46.50
to the ATO, and received $46.50 from Georgina. Once the ATO
calculates Georgina's amount of tax payable for 2009-10, her
tax outcome is no different than it would have been had she
provided her TFN or ABN to Ginger Bank in the first place.
She will receive a credit from the ATO of $46.50, and will
include the $100 discount in her assessable income (unless
the upfront concession is applicable).
Interests may relate to past or prospective employers
319. An employee share scheme is defined as a scheme for providing ESS
interests in a company to employees, including past or prospective
employees, of the employer. [Schedule 1, item 1, subsection 83A-
10(2)]
320. The extension to past or prospective employees is an integrity
measure to ensure that arrangements are not designed to occur
before or after employment in order to avoid the employee share
scheme rules. This is consistent with the general treatment of
employment benefits elsewhere in the tax law, for example, in the
FBTAA 1986.
Integrity rule about share trading and investment companies
321. Consistent with the current law, an employee will not be eligible
for the upfront concession or deferred taxation if:
. the employee is employed by a company whose predominant
business is the acquisition, sale or holding of shares,
securities or other investments; and
. the employee is also employed by a subsidiary of that
company, a holding company of that company, or an
subsidiary of the holding company of that company.
[Schedule 1, item 1, subsection 83A-35(5) and paragraph 83A-
105(1)(b)]
322. This rule prevents schemes which are contrived to provide employees
with an interest in unrelated companies, through the establishment
of share trading companies within the company group.
323. A holding company that holds shares in operating subsidiaries that
are not investment companies will not itself be an investment
company.
324. This integrity measure has been replicated from Division 13A of the
ITAA 1936, where it was introduced to prevent a particular tax
avoidance arrangement.
Refund of tax for forfeited shares
325. The new law provides for a refund of tax paid in relation to ESS
interests in certain circumstances where those interests are
forfeited after the employee has been taxed on the discount.
326. The refund is only available where the employee had no choice but
to forfeit the ESS interest (except when that choice was to cease
employment), and where the conditions of the scheme were not
constructed to protect the employee from market risk.
327. Under such circumstances, the forfeited ESS interest is treated as
never having been acquired, and the taxpayer can claim a refund of
income tax by requesting that the Commissioner amend their income
tax assessment to remove income previously included in their
assessable income.
328. There is no time limit on amending an assessment to exclude an
amount from a taxpayer's assessable income for a share interest
which is forfeited, or for a right which was lost without being
exercised. [Schedule 1, item 19, item 30 in the table in
subsection 170(10AA) of the ITAA 1936]
329. As the refund provisions are not intended to protect the employee
from downside market risk, a refund will not be available where the
share interest is forfeited due to a choice of the employee (except
when that choice was to cease employment). Such a choice may
include a choice not to exercise or dispose of an ESS interest, or
some other choice of the employee that results in the forfeiture of
the ESS interest.
330. Specifically, the new law is taken never to have applied in
relation to an ESS interest (resulting in a refund of any
previously paid income tax) where:
. an amount of employee share scheme discount has been, or
would be, included in the employee's assessable income;
. the employee has either forfeited the ESS interest or, in
the case of a right, the employee has lost the right
without having disposed of or exercised it; and
. the forfeiture or loss is not the result of a choice made
by the individual (except when that choice was to cease
employment), and nor is it the result of a condition of
the scheme that has the direct effect of wholly or partly
protecting the employee from a fall in the market value of
the ESS interest.
[Schedule 1, item 1, section 83A-310]
331. Whether or not forfeiture is as a result of a choice of an employee
is something to be assessed on a case-by-case basis.
332. A choice to leave employment does not result in ineligibility for a
refund. This provision recognises that in most cases a decision to
leave employment will not primarily be based on the employee share
scheme tax consequences of that decision, and that a refund of tax
paid over the forfeited ESS interests in appropriate in such cases.
333. A situation in which an employee ceases employment primarily to
avoid the employee share scheme rules, such to obtain a refund,
only to recommence employment with the same employer shortly after,
will likely be subject to the general anti-avoidance rules.
334. In situations where a refund is not available under the refund
provisions, the taxpayer may be able to claim a capital loss under
the CGT provisions.
1. : Genuine performance hurdle not met
Megan enters into an ESS arrangement with her employer,
Motorcar Co. She will receive 1,000 Motorcar Co shares,
subject to a performance hurdle requiring the company's
market share to have increased in two years time. Megan
cannot dispose of these rights in the two-year period.
Megan ceases employment after one year, triggering the ESS
deferred taxing point, and pays tax on the discount she
received for the 1,000 Motorcar Co shares and any subsequent
gains (or losses). At the end of the two-year period, the
market share of Motorcar Co did not increase and her rights
to the shares are forfeited.
Eligible for refund: Yes. Megan has paid tax on the
discount, could not have chosen to dispose of or exercise
the rights prior to the two-year point, and forfeited the
rights because a genuine performance hurdle was not met.
2. : ESS interest forfeited due a choice of the employee
Jane enters into an ESS arrangement with her employer,
Tinderbox Co. She receives rights to 1,000 Tinderbox Co
shares in one year, if she is still employed with Tinderbox
Co at that time.
After one year, Jane has met this performance hurdle and
pays tax on the discount she received on the rights to 1,000
Tinderbox Co shares because they are no longer at risk of
forfeiture. She has a two-year window to exercise the
rights to the shares. As the market price of Tinderbox Co
shares remains below the exercise price for the duration of
the two-year window, Jane decides not to exercise her
rights.
Eligible for refund: No. The ESS interests were forfeited
because of a choice made by Jane not to exercise the rights.
Jane will be able to claim for a capital loss equal to the
cost base of the rights.
3. : ESS interest forfeited due a choice of the employee
Azuma enters into an ESS arrangement with his employer,
Plodder Co. Azuma receives shares in Plodder Co, but will
forfeit them if he ceases employment with Plodder within the
next three years. Azuma pays tax upfront because Plodder's
scheme is not eligible for deferred tax.
Azuma leaves Plodder Co to work for Runner Co.
Eligible for refund: Yes. The ESS interest was forfeited
because of Azuma's choice to cease employment. Azuma will
be able to claim a refund for the tax paid over his shares.
4. : Condition of the scheme that protects the employee from market
risk
Dane enters into an ESS arrangement with his employer, Frog
Ltd. He will receive non-transferable rights over 1,000
Frog Ltd shares which will be forfeited if he ceases
employment with Frog Ltd within one year. The rights can be
exercised at anytime between one and six years after they
were acquired, however the scheme restricts them from being
exercised if the market price is below the strike price.
Dane holds the rights for six years. The market price never
exceeds the strike price, and the rights lapse. Dane never
had a choice to dispose of or exercise the rights as a
condition of the scheme restricted him from doing so.
Eligible for refund: No. The condition of the scheme
restricting Dane from exercising the right so long as the
market price was below the strike price, had the direct
effect of protecting Dane from any downside market risk. As
Dane would lose money if he had chosen to exercise the
rights when the market price was below the strike price, the
condition of the scheme appears contrived to artificially
restrict Dane from making that choice.
5. : ESS interest forfeited due to no choice of the employee
Katie enters into an ESS arrangement with her employer,
Shoehorn Co. Katie receives non-transferable rights to
1,000 Shoehorn Co shares that will be exercisable in 10
years time. Katie will forfeit these rights if she ceases
employment with Shoehorn Co in the next ten years.
Katie's rights are at real risk of forfeiture, and the
scheme meets the other conditions for deferral, so she will
defer tax until the ESS deferred taxing point. The maximum
time period for deferral is seven years, so she will pay tax
on the discount at seven years.
After eight years Katie is made redundant and forfeits the
rights which she has paid tax on.
Eligible for refund: Yes. Being made redundant was not a
choice of Katie's, and she did not forfeit the rights due to
a condition of the scheme with the direct effect of
protecting her from downside market risk.
335. The rule which deems a taxpayer to have received market value for
an asset when they receive no capital proceeds is turned off in
cases where an ESS interest is forfeited. [Schedule 1, item 40,
paragraph 130-80(4)(a)]
336. The market value substitution rule is also turned off in relation
to certain CGT events (E4, G1 and K8) to ensure that a employee who
pays money to acquire ESS interests will receive a capital loss in
respect of this payment if they forfeit those ESS interests.
[Schedule 1, item 40, paragraph 130-80(4)(b)]
Deduction by employers
337. Under the general income tax law, an employer could not deduct
anything for directly providing shares or rights to shares in
itself to its employees. This is because the issue of share
capital would not be a loss or outgoing even though it relates to
the remuneration of its employees. [Schedule 1, item 1, section
83A-200]
Specific deduction
338. In order to encourage the provision of shares, stapled securities
and rights to shares or stapled securities under certain employee
share schemes, a limited specific deduction is provided to
employers. An employer can deduct an amount for shares, stapled
securities and rights to shares or stapled securities they provide
to employees under an employee share scheme if the employee would
be eligible for the upfront concession, disregarding the income
test. [Schedule 1, item 1, subsection 83A-205(1)]
339. The amount of the deduction is equal to the discount received by
the employee on the security that they would not have had to
include in their assessable income because the security came from a
scheme that meet the conditions for the upfront concession detailed
in paragraphs 1.114 to 1.136. The income test for the upfront
concession is disregarded when determining an employer's
eligibility to claim a deduction. [Schedule 1, item 1, subsections
83A-205(2) and (3)]
340. The maximum deduction is $1,000 which is the maximum amount that an
employee is entitled to reduce the discount included in their
assessable income by.
341. If two or more employers jointly provide the security to an
employee, the deduction is to be apportioned between them on a
reasonable basis. [Schedule 1, item 1, subsection 83A-205(4)]
1. : Deduction for joint providers
Alister receives 1,000 stapled securities from his employer,
Taxation Services Pty Ltd, under an employee share scheme.
Alister's adjusted taxable income is less than $180,000.
The stapled securities are valued at $1 each and Alister has
not had to pay anything towards acquiring them under the
employee share scheme.
The employee share scheme has been provided on a non-
discriminatory basis; Alister has no real risk of losing the
stapled security; he has no other securities in his
employer; he is required to hold the securities for at least
3 years; and the stapled security contains an ordinary share
in Taxation Services Pty Ltd and a unit in a unit trust,
Taxation Services Service Trust.
Alister would be entitled to reduce the $1,000 discount
included in his assessable income from the acquisition of
the stapled securities by $1,000.
The stapled securities were jointly provided by Taxation
Services Pty Ltd and Taxation Services Service Trust
(treated under the employee share scheme rules as one
entity).
Taxation Services Pty Ltd and Taxation Services Service
Trust would need to apportion the deduction between them.
As the value of each component of the stapled security is
equal, a reasonable apportionment would be for each to
receive $500 deduction.
Timing of general deduction
342. A general deduction may be available in relation to the indirect
provision of securities to employees under an employee share
scheme, when an employer provides money to an employee share trust
for the purpose of providing its employees with securities in
itself. The employee share trust may acquire the securities by
buying them on the market or by participating in a share issue by
the employer.
343. An employer can generally deduct an amount of money or property
(which is not a share in itself) provided to a employee share trust
for the purpose of remunerating its employees under an employee
share scheme.
344. The deduction would generally occur in the income year in which the
employer incurred the loss or outgoing. However, this arrangement
may allow an employer to artificially bring forward future
deductions by making contributions to the trust that are in excess
of its requirements under an employee share scheme.
345. To prevent an artificial bring forward of these deductions, the
employee share scheme rules delay the deduction until the employee
acquires an ESS interest. [Schedule 1, item 1, section 83A-210]
346. The situations in which a deduction is deferred are not limited to
cases involving an employee share trust. Any arrangement in which
an employer provides ESS interests under an employee share scheme
indirectly by providing another entity with money or property will
result in a deduction being deferred until the employee acquires
the security.
Foreign employment
347. Consistent with the treatment of most other types of income,
whether an amount is included in a taxpayer's assessable income
under the new employee share scheme rules will depend on the
taxpayer's residency status and the source of the income.
348. Under the core rules of the Australian income tax system, an
Australian resident taxpayer is subject to income tax on their
worldwide income. A foreign resident taxpayer is only subject to
Australian income tax on their Australian sourced income.
349. Under the existing law, this outcome is achieved by excluding
discounts from interests acquired under employee share schemes from
tax under the employee share scheme tax rules, to the extent that
they relate to foreign service of a taxpayer.
350. This mechanism operates in a manner inconsistent with core rules.
The new rules use the core rules to achieve the desired outcome.
The new rules instead include source rules and rely on the core
rules to the exclude foreign sourced income of foreign residents
from Australian income tax. That is, the employee share scheme
rules attribute a source to discounts received on securities
acquired under employee share schemes.
351. To the extent that a discount on an ESS interest relates to
employment outside Australia, the discount is taken to be from a
foreign source. In the case of an ESS interest that is subject to
a deferred taxing point, it is the amount included in your
assessable income that is attributed a source (that is, both the
discount and subsequent gains are attributed with a source). The
attribution is done in manner consistent with the rule applying to
discounts. [Schedule 1, item 1, subsections 83A-25(2) and 83A-
110(2)]
352. The apportionment between foreign sourced and Australian sourced
income is to be done in a manner consistent with Organisation for
Economic Development and Cooperation (OECD) practice, as explained
in the explanatory memorandum to the New International Tax
Arrangements (Foreign-owned Branches and Other Measures) Bill 2005.
353. Source is attributed to amounts 'included' in assessable income
either upfront or under the deferral method at the ESS deferred
taxing point. The inclusion in assessable income is merely
notional as all amounts included in assessable income must pass
through the core rules before being taken into account in the
calculation of taxable income. At this time foreign sourced income
of foreign residents will be removed from the calculation of
taxable income.
354. Whether the discount on the ESS interest acquired under an employee
share scheme relates to employment in Australia or outside
Australia is a question of fact that needs to be determined on a
case-by-case basis.
355. Australian resident taxpayers are subject to Australian income tax
on all discounts they receive under employee share schemes
regardless of whether they received it in relation to employment in
Australia or outside Australia. However, this may be affected by
Australia's double tax treaties and the temporary residents rules.
356. Foreign resident taxpayers are only subject to Australian income
tax on discounts they receive under employee share schemes to the
extent that the discount relates to the employment in Australia.
The core rules are contained in sections 6-5 and 6-10 of the
ITAA 1997.
357. The outcome effectively mirrors the tax treatment of employment
income. It has been necessary to modify the treatment of employee
share scheme discounts received in respect of employment outside
Australia in order to bring the employee share scheme rules into
closer alignment with the ordinary treatment of salary and wage
income and to prevent taxpayers avoiding the recent changes to
section 23AG of the ITAA 1936 (exemption for foreign employment
income).
1. : Foreign source income
Bob is a foreign resident and works for a multinational
company, Mimosa Co in Hong Kong.
Bob receives 1,000 shares in Mimosa Co under Mimosa Co's
employee share scheme for no consideration. The 1,000
shares relate to Bob's employment with Mimosa Co over the
next 24 months and have a market value of $5,000. The
shares are subject to forfeiture conditions.
One year after acquiring the shares under the employee share
scheme, Mimosa Co transfers Bob to Australia for five months
to work in Mimosa Co's Australian operations in Darwin.
After the five month posting, Bob returns to Hong Kong.
At the end of the 24 months, the forfeiture conditions cease
to apply and Bob and no disposal restrictions exist. The
shares at this time are subject to an ESS deferred taxing
point. The market value of the shares is $10,000 at the
taxing point.
Bob notionally includes in his assessable income the full
$10,000. The ESS rules attribute $2,083 (5/24) to be from
an Australian source and $7,917 (19/24) to be from a foreign
source.
As Bob is a foreign resident, only the $2,083 is included in
his taxable income.
Temporary residents
358. The employee share scheme rules applying to temporary residents
have been amended as a result of these reforms.
359. The temporary residents' provisions provide exemptions from
Australian tax on foreign sourced income of individuals who are
considered to be temporary residents of Australia for tax purposes.
360. These exemptions extend to CGT exemptions for capital gains
realised on CGT assets that are not taxable Australian property.
However, part of the capital gains realised on some shares and
rights acquired under employee share schemes were excluded from
these general exemptions. This was done to discourage the possible
re-characterisation of employment income as a capital gain to avoid
tax.
361. With the introduction of the new integrity rules applying to
employee share schemes, the potential for taxpayers to exploit the
temporary residents' rules has been minimised.
362. The current employee share scheme exceptions to the temporary
residents are highly complex. They seek to only provide the
exemption to the part of a capital gain realised on ESS interests
that were subject to upfront taxation and accrued before a notional
deferred taxing point. Replicating these rules within the new
taxation framework would add significant complexity and compliance
costs.
363. Given the new framework underlying the taxation of employee share
schemes, it is no longer necessary to maintain these exceptions to
the general temporary residents' exemptions. These amendments
therefore repeal those exceptions. [Schedule 1, item 62]
364. Capital gains realised on shares and rights acquired under an
employee share scheme (after a taxing point has occurred under
Division 83A) will be eligible for the temporary residents' CGT
exemption similar to other CGT assets, regardless of whether a
notional taxing point has occurred or not.
365. Consistent with other CGT assets, the temporary residents'
exemptions will not apply to shares or rights acquired under an
employee share scheme if those shares or rights are taxable
Australian property.
366. There are also a number of other minor amendments made to the
temporary residents rules to update referencing, to ensure its
application to employee share scheme discounts applies in manner
consistent with the treatment of salary and wages and to ensure
that the cost setting rules within the employee share scheme rules
interact correctly with those in the temporary residents' rules.
[Schedule 1, items 60 and 61 and 63 and 64]
Miscellaneous
Employment benefits that later become ESS interests
367. At the time of acquisition it may be unclear whether a right to an
employment benefit will result in the receipt of an ESS interest,
or it may be unascertainable how many ESS interests will be
received. In such circumstances, that right will be considered to
have been an ESS interest from the time that the original right to
an employment benefit was acquired, if and when it becomes clear
that the right to the employment benefit will result in the receipt
of a definite number of ESS interests. [Schedule 1, item 1,
section 83A-340]
368. This is to ensure that employment benefits provided in the form of
discounted shares or rights to shares are taxed consistently and
appropriately under the employee share scheme rules.
369. This provision will apply, for example, to an employment benefit
that is a right to an indeterminate number of shares, or to a
benefit that may be received in shares, in cash, or in some other
form.
370. When the nature of the right to an employment benefit as an ESS
interest becomes clear, the Commissioner may amend an employee's
income tax assessment for the income year in which the taxing point
for the ESS interest occurred (based on the treatment of the right
as an ESS interest from the time of its acquisition). The
Commissioner can amend an assessment relating to an employee share
scheme at anytime, for the purposes of a taxing an employment
benefit which becomes an ESS interest. [Schedule 1, item 19, item
35 in the table in subsection 170(10AA) of the ITAA 1936]
371. Reporting requirements apply to all ESS interests under new
employee share scheme rules. If an employer becomes aware of an
omission or change in any information provided to the Commissioner
under the reporting requirements, such as if it becomes clear that
a right provided to an employee in a previous income year was a
right to ESS interests, the employer must inform the Commissioner
of any change or omission as soon as possible. This information is
to be provided in the approved form. [Schedule 1, item 5, section
392-10 in Schedule 1 to the TAA 1953]
372. The shortfall interest charge may apply in situations where the
Commissioner amends an employee's income tax assessment for an
earlier income year to include additional amounts of assessable
income that result in extra income tax becoming payable.
1. : Simple example
Faiza is granted rights to an indeterminate number of shares
in her employer, Dishwasher Co. She will receive rights to
a number of shares in two years time, calculated on a one-
for-one basis with the number of dishwashers she sells over
that period.
Over the two years Faiza sells 437 dishwashers, and as a
result, receives rights to 437 shares in Dishwasher Co. She
will work out whether she would be taxed upfront or defer
tax under the employee share scheme rules, as though she had
received rights to 437 Dishwasher Co shares two years
earlier, at the time she received the original right.
2. : Deferral or upfront taxation
Miranda is granted rights to an indeterminate number of
shares in her employer, Longhorn Co, as a part of her total
employment remuneration package. Miranda already owns a 6
per cent stake in Longhorn Co.
The number of shares which Miranda will receive is
calculated by reference to the increase in Longhorn Co's
share price over five years.
In five years time, Longhorn informs Miranda that she has
rights to 568 shares, calculated by reference to a formula
in Longhorn Co's share policy. At that point, Miranda's
rights are taken to always have been ESS interests.
Because Miranda has effective ownership of greater than 5
per cent of her employer, she is not eligible to defer tax
over her ESS interests. Miranda would have been taxed
upfront on these ESS interests.
Miranda will seek an amendment of her income tax assessment
for the income year five years earlier to include an amount
in relation to these ESS interests in her assessable income.
Miranda is also not eligible for the upfront concession
because she has effective ownership of greater than 5 per
cent of her employer.
3. : Share appreciation rights
Caitlin is granted rights to an indeterminate number of
shares in her employer, Redbooks Co, as a part of her total
employment remuneration package. Caitlin receives this
employment entitlement in January 2010. Caitlin will
receive the rights to shares in three years time, provided
she is still employed by Redbooks Co at that time.
The number of shares which Caitlin will be entitled to on
exercise is calculated by reference to the increase in
Redbook Co's share price over the three years.
Such a right to an indeterminate number of shares cannot be
identified as specific right to a number of 'rights to
shares', until such time as the number of shares which would
be received on exercise of the right can be calculated.
In January 2013, Caitlin receives the rights to 988 shares,
by reference to a formula in Redbook's share policy. At
that point, Caitlin's rights to shares are taken to always
have been ESS interests (rights to 988 shares).
Caitlin's rights were subject to a real risk of forfeiture
(due to the condition requiring her to forfeit the rights if
she left employment with Redbooks) when she acquired the ESS
interest in January 2010, and would have deferred tax until
the ESS deferred taxing point.
Caitlin now needs to work out when the taxing point for her
ESS interests occurred or will occur.
Caitlin remained employed with Redbooks over the three-year
period. During that period, she did not yet have the
shares, did not know how many shares she would receive, and
was restricted from selling or exercising her rights to
those shares. In January 2013 when Caitlin receives her 988
shares, she is not subject to any further restrictions on
sale, and her ESS deferred taxing point occurs.
Caitlin will include an amount in relation to her ESS
interests in her income tax assessment for the 2012-13
income year.
4. : Employment benefits that may or may not be received in ESS
interests
Peter is employed by Bluebooks Co. As a part of his total
employment remuneration package, he receives a right 10,000
Bluebook shares in 10 years time, if he remains employed
with Bluebooks Co for that period. However, Bluebooks
management reserves the right to grant Peter the cash value
of the shares rather than actual Bluebooks Co shares.
As it is uncertain whether Peter will receive shares or
cash, Peter does not have 'rights to shares'. As such,
Peter's right cannot yet be characterised as an ESS
interest.
Peter remains employed with Bluebooks for 10 years, and
receive the rights to 10,000 shares. It is now considered
that Peter acquired the rights to these shares 10 years
previously, and that these rights were always ESS interests
provided under an employee share scheme.
Peter now needs to work out when the taxing point on the
rights to his shares occurred. Since he was required to
remain employed by Bluebooks Co, Peter's rights were at real
risk of forfeiture and he was eligible to defer tax on those
rights. Since Peter did not have the ability to sell his
rights during the 10 years, the first deferred taxing point
for Peter would have occurred seven years after he acquired
the rights to the shares (the maximum period of deferral).
Peter's income tax assessment for three years ago must
therefore be amended to include an amount in relation to the
rights to 10,000 Bluebook shares.
5. : The ESS deferred taxing point operates as though the right was
always an ESS interest
Odon is employed by Drover Co. As a part of his total
employment remuneration package, he receives a right 50,000
Drover shares in seven years time, if Drover Co's share
price increases by 30 per cent or greater over that time.
However, Drover management reserves the right to grant Odon
the cash value of the shares rather than actual Drover Co
shares.
As it is uncertain whether Odon will receive shares or cash,
Odon does not have 'rights to shares'. As such, Peter's
right cannot yet be characterised as an ESS interest.
Four years after acquiring the right, Odon ceases employment
with Drover Co.
Seven years after acquiring the right, Drover Co's share
price has increased by 50 per cent, and Odon receives the
rights to 50,000 shares. It is now considered that Odon
acquired the rights to these shares seven years previously,
and that these rights were always ESS interests provided
under an employee share scheme.
Odon now needs to work out when the taxing point on the
rights to his shares occurred.
Since Odon would have forfeited his rights if Drover's share
price did not increase by 30 per cent, Odon's rights were at
real risk of forfeiture and he was eligible to defer
taxation on those rights.
Although Odon was not able to sell his ESS interests during
the seven years, he ceased employment with Drover Co four
years after acquiring the rights, triggering the ESS
deferred taxing point.
Odon will seek an amendment of his income tax assessment for
the income year in which he ceased employment, to include an
amount in relation to his ESS interests in his assessable
income.
6. : No ESS interests are received
Chikako is granted a right to shares in her employer,
Foxhound Co, as a part of her total employment remuneration
package. Chikako will receive the shares in three years
time, provided she meets certain performance hurdles.
However, Foxhound Co management reserves the right to grant
Chikako the cash value of the shares rather than actual
Foxhound Co shares.
Chikako fails to meet her performance hurdles, and receives
neither Foxhound Co shares nor a cash payment in lieu. She
does not have any ESS interests, and will not be taxed under
the employee share scheme rules.
7. : No ESS interests are received
Oscar is granted a right to shares in his employer,
Stonework Co, as a part of his total employment remuneration
package. Oscar will receive 200 Stonework Co shares in two
years time, provided he meets certain performance hurdles.
However, Stonework Co management reserves the right to grant
Oscar the cash value of the shares rather than actual
Stonework Co shares.
Oscar meets his performance hurdles, and Stonework Co
management exercises its discretion to grant the value of
the shares in cash. He does not have any ESS interests, and
will not be taxed under the employee share scheme rules.
This income will be assessed under other provisions in the
tax law.
Relationships similar to employment
373. The employee share scheme rules cover not only employees of a
company offering an employee share scheme, but also cover employees
in relationships similar to employment. [Schedule 1, item 1,
section 83A-325]
374. This is to ensure that people such as directors or office holders
who are not considered employees, but who are in an employee-like
relationship are not excluded from participating in employee share
schemes.
375. The rules also cover taxpayers who are independent contractors.
Ceasing employment provision
376. An employee is considered to have ceased employment when they are
no longer employed either by their employer, a holding company or
subsidiary of their employer, or a subsidiary of a holding company.
[Schedule 1, item 1, section 83A-330]
Stapled securities
377. Stapled securities are treated in the same way as shares under the
employee share scheme rules provided at least one of the elements
of the stapled security is a share in a company. This limitation
is necessary in order to maintain the necessary link of the rules
with acquisitions of interests in corporate entities. [Schedule 1,
item 1, subsection 83A-335(1)]
378. In other words, these stapled securities acquired under an employee
share scheme are subject to the employee share scheme rules as if
the stapled security were a share in a company. Rights to stapled
securities are treated in the same way as rights to shares.
379. Employees who receive a stapled security under an employee share
scheme must therefore include in their assessable income any
discount received on acquisition of that security.
380. A condition for eligibility for any of the employee share scheme
tax concessions is that the security acquired under the scheme
relates to an ordinary share. In the case of a stapled security,
it meets this condition if the stapled security is made up of share
that is an ordinary share. [Schedule 1, item 1, subsection 83A-
335(2)]
381. The stapled security includes interests in two or more entities.
For the purposes of the employee share scheme rules, these entities
are taken to be one single entity. More specifically, the non-
corporate entities are taken to be parts of the corporate entity.
This allows, amongst other things, for the employment conditions to
be satisfied. [Schedule 1, item 1, subsection 83A-335(3)]
382. As a result of consultation, the new employee share scheme rules
have been applied more broadly than the previous employee share
scheme rules. The employee share scheme rules apply to a wider
class of stapled securities.
1. : Stapled securities
Kim is employed by Kiwi Dairy Property Trust in Bega. Units
in Kiwi Dairy Property Trust are stapled with shares in Kiwi
Dairy Limited. Kim acquires 2,000 stapled securities under
an employee share scheme. The securities have a market
value of $1.50 per security and Kim has paid 50¢ towards
each security.
As each stapled security contains at least one share in a
company, the stapled security is covered by the employee
share scheme rules in the same way as the employee share
scheme rules apply to shares.
Therefore, the discount Kim receives on the acquisition of
the securities must be included in her assessable income
($2,000).
However, the employee share scheme and Kim's acquisition of
the security meet the conditions for deferral of the taxing
point including because Kim's employment is taken to be with
a company (as employee share scheme rules treat the trust as
part of the company) and the share in Kiwi Dairy Limited is
an ordinary share.
Kim must defer including the discount in her assessable
income until the deferred taxing point occurs.
Entities treated like companies
383. In certain cases and for various reasons, the tax law treats
particular classes of particular entities as companies. Most
often, this is for reasons of integrity.
384. Examples of this are corporate limited partnerships and corporate
unit trusts and public trading trusts under the consolidation
rules. Under the corporate limited partnership rules and the
consolidation regime rules dealing with corporate unit trusts and
public trading trusts, those entities are treated as companies for
all tax law purposes. This includes treating interests in those
entities as shares in a company.
385. The employee share scheme rules therefore also apply to interests
in these entities acquired under employee share schemes in the same
way as the rules apply to shares in companies.
1. : Entities treated like companies
Litsa is employed by AF & TS remuneration specialists which
is a corporate limited partnership.
Litsa receives an interest in the corporate limited
partnership under an employee share scheme (i.e., she buys
into the partnership). The interest is provided to Litsa at
a 10 per cent discount to the market value.
The discount is included in Litsa's assessable income in the
year she acquired the interest. The interest is not subject
to forfeiture conditions and Litsa is not required to hold
the interest for a minimum period.
386. There has been no change to the treatment of these types of
entities under the new employee share scheme rules.
Ability to amend income tax assessment
387. There is no limit to when the Commissioner can amend an assessment
relating to an employee share scheme, for the purposes of the
refund provisions. [Schedule 1, item 19, item 30 in the table in
subsection 170(10AA) of the ITAA 1936]
388. Since the tax on an ESS interest can be deferred for up to seven
years, and it will not be known before hand whether or not shares
will be forfeited, it is inappropriate to limit the period to which
an income tax assessment can be amended.
389. The Commissioner can also amend an assessment relating to an
employee share scheme at anytime, for the purposes of a taxing an
employment benefit which becomes an ESS interest. See
paragraphs 1.367 to 1.372 for the treatment of rights that later
become ESS interests. [Schedule 1, item 19, item 35 in the table
in subsection 170(10AA) of the ITAA 1936]
390. These provisions are not limited to the direct tax levied by the
employee share scheme rules, but also includes flow-on effects to
other tax which the employee share scheme rules might give rise to.
Application and transitional provisions
391. The new employee share scheme rules apply to ESS interests acquired
on and after 1 July 2009. [Schedule 1, item 83, paragraph 83A-
5(1)(a) of the IT(TP)A 1997]
392. A tiebreaker rule provides that if the time of acquisition differs
between the new and the current law, the time of acquisition under
the current law will be used and the time of acquisition under the
new law will be disregarded. That is, if a share or right was
acquired under the current law before 1 July 2009, and under the
new law the ESS interest was acquired after 1 July 2009, the old
law continues to apply to that arrangement. [Schedule 1, item 83,
paragraph 83A-5(1)(b) of the IT(TP)A 1997]
393. This rule will provide clarity in any unforeseen circumstances
where the dates of acquisition may differ between the two regimes.
1. : Acquisition tiebreaker
Michelle acquired shares in her employer under an employee
share scheme. The rules in Division 13A consider her to
have acquired the share on 20 June 2009. The new employee
share scheme rules consider her to have acquired the ESS
interest on 25 July 2009.
The tiebreaker transitional provision provides that she is
considered to have acquired the shares on 20 June 2009 under
the Division 13A rules, and not under the new employee share
scheme rules in Division 83A.
Shares and rights transitioned to the new rules
ESS interests over which tax is being deferred are transitioned to
the new rules
394. Shares or rights acquired before 1 July 2009, on which tax has been
deferred beyond 1 July 2009, will be brought within the new
employee share scheme rules. This will simplify the law and
improve the interaction of the employee share scheme rules with
other areas of the law. [Schedule 1, items 83 and 86,
subsections 83A-5(2) and (3) of the IT(TP)A 1997]
Current taxing points are preserved
395. An employee who acquired shares or rights under the current
employee share scheme rules (Division 13A of the ITAA 1936), or the
previous employee share scheme rules (section 26AAC of the
ITAA 1936), will continue to pay tax at the time determined by
reference to those previous rules. [Schedule 1, item 83,
paragraph 83A-5(4)(b) of the IT(TP)A 1997]
396. However, the new 30 day rule in the ESS deferred taxing point rules
will apply to the old taxing points for transitioned shares or
rights. The deferred taxing point for the ESS interest is moved to
the time the employee disposes of the interest, if they dispose of
the interest within 30 days after the original deferred taxing
point. [Schedule 1, item 83, paragraph 83A-5(4)(c) of the IT(TP)A
1997]
397. Applying the new 30-day rule to transitioned shares and rights will
assist in preserving the effect of the special market valuation
rules that existed in Division 13A. It also lowers the probability
that shares or rights will in subject to multiple taxation regimes
in very short periods of time.
1. : Application of previous taxing point
Mark acquired shares or rights in his employer under an
employee share scheme on 31 January 2002. Division 13A of
the ITAA 1936 applied to his scheme, his scheme was a
qualifying scheme and Mark elected to defer tax. Under
Division 13A, Mark expected his cessation point to occur on
31 January 2012 (subject to him remaining in employment).
Mark's shares and rights will be transitioned into the new
employee share scheme rules. The transitional provisions
will ensure that his taxing point will still occur when it
otherwise would have, on 31 January 2012 (subject to his
remaining in employment).
If Mark disposed of his shares or rights within 30 days of
his original taxing point, for example on 5 February 2012,
the deferred taxing point will be the time of disposal.
Refund provisions are preserved
398. Transitional provisions have also been included to ensure the
introduction of the new law will not affect an employee's
eligibility for a refund in respect of rights they acquired prior
to 1 July 2009. Employees may claim a refund of tax paid on the
right, if they forfeit the right and a refund would have been
available under the rules applying at the time that they acquired
the right. [Schedule 1, item 83, paragraph 83A-5(4)(d) of the
IT(TP)A 1997]
1. : Refund provisions
Lee acquired rights in her employer under an employee share
scheme in 2004. Division 13A of the ITAA 1936 applied to
her scheme, her scheme was a qualifying scheme and she
elected to defer tax. She did not have a cessation time
prior to 1 July 2009, so her rights are transitioned into
the new rules.
In 2010 Lee ceases employment, triggering the cessation
time, and Lee pays tax on her rights.
In 2011 Lee allows her rights to lapse without having
exercised them. As she would have been able to claim a
refund of tax under Division 13A, she will be able to claim
a refund of tax under the transitional provisions.
Foreign employment provisions are preserved
399. Consistent with the current law, employees will not pay tax on
shares and rights that have been transitioned into the new rules to
the extent that the shares or rights relate to the employee's
employment outside Australia. [Schedule 1, item 83, paragraph 83A-
5(4)(a) of the IT(TP)A 1997]
TFN withholding tax (ESS) does not apply
400. The requirement for employers to withhold TFN withholding tax in
situations where the employee has not quoted their TFN, or their
ABN to the employer by the end of the income year does not apply to
shares and rights that have been transitioned into the new rules.
[Schedule 1, item 83, paragraph 83A-5(4)(e) of the IT(TP)A 1997]
401. As employers will not necessarily know whether or not an employee
has elected to be taxed upfront or to defer tax under the current
rules, they may not know whether they are required to withhold tax.
Shares or rights acquired under section 26AAC are not excluded from
being employment termination benefits
402. Consistent with the current law, shares or rights acquired under
section 26AAC of the ITAA 1936 transitioned into the new rules are
not excluded from being employment termination payments. [Schedule
1, item 83, paragraph 83A-5(4)(g) of the IT(TP)A 1997]
CGT acquisition date is preserved for certain shares and rights
403. The CGT acquisition date in relation to a transitioned share or
right, acquired under Division 13A of the ITAA 1936 over which an
employee had legal title at the time the share or right was
acquired under the current ESS rules, will be the time at which the
employee became legally entitled to the share or right. [Schedule
1, item 83, subparagraph 83A-5(4)(f)(i) of the IT(TP)A 1997]
404. This rule prevents certain taxpayers from having their CGT
acquisition date for shares or rights retrospectively amended by
operation of the new employee share scheme rules.
Certain new rules apply to transitioned shares or rights
405. The new rules relating to, among other things, employer reporting
and calculating the amount to include in assessable income will
apply to those shares or rights which have been brought within the
new rules.
406. Applying the new reporting rules to shares or rights which have
been brought within the new rules will assist the Commissioner in
ensuring the correct tax is paid in relation to those shares or
rights.
407. As an employer will not know whether or not an employee has elected
to be taxed upfront or to defer tax under the current employee
share scheme rules, the employer is required to report shares or
rights with a possible cessation time, regardless of whether the
shares or rights were in fact taxed upfront. [Schedule 1, item 83,
subparagraph 83A-5(4)(f)(ii) of the IT(TP)A 1997]
408. The Commissioner will consult on the design of the approved form to
assist employers covered by these arrangements.
409. When calculating the amount to include in assessable income the new
rules will apply. That is, at the deferred taxing point (which may
be determined by reference to Division 13A or section 26AAC of the
ITAA 1936), the market value of the shares or rights is reduced by
the cost base of the shares or rights. When determining market
value the new arrangements will apply (see paragraphs 1.106 to
1.113).
Employment benefits that later become ESS interests
410. Sometimes it is unclear at the time of acquisition of a right
whether will be received in the form of an ESS interest, or it may
unclear how many ESS interests will be received as a result of its
exercise. If it becomes clear that the right will be received in a
definite number of ESS interests, it is taxed under the employee
share rules as though it were always clearly as ESS interest. See
paragraphs 1.367 to 1.372 for further discussion of these types of
benefits.
411. This provision would apply, for example, to an employment benefit
that is a right to an indeterminate number of shares, or to a
benefit that may be received in shares, in cash, or in some other
form. The provision ensures that employment benefits provided in
the form of discounted shares or rights to shares are taxed
consistently.
412. When the nature of the right to an employment benefit as an ESS
interest becomes clear, the Commissioner may amend an employee's
income tax assessment for the income year in which the taxing point
for the ESS interest occurred (based on the treatment of the right
as an ESS interest from the time of its acquisition). The
Commissioner can amend an assessment relating to an employee share
scheme at anytime, for the purposes of a taxing an employment
benefit which becomes an ESS interest.
413. Rights acquired prior to 1 July 2009, which only clearly become ESS
interests after 1 July 2009 (by operation of this rule) will be
subject to the current employee share scheme rules. If the
operation of the current rules would have them defer tax over 1
July 2009, they will be transitioned into the new rules, consistent
with other transitional rights or shares. [Schedule 1, item 83,
section 83A-15 of the IT(TP)A 1997]
1. : Employment benefits that later become ESS interests may be
transitioned to the new rules
Lyra is granted a non-transferable right to 4,000 shares in
her employer, Waterworks Co, as a part of her total
employment remuneration package.
Lyra receives this right in January 2008.
Lyra will forfeit the right is she ceases employment with
Waterworks Co within five years of acquiring the right.
However, Waterworks management reserves the right to grant
Lyra the cash value of the shares rather than actual
Waterworks Co shares.
As it is uncertain whether Lyra will receive shares or cash,
Lyra does not have 'rights to shares'. As such, Lyra's
right cannot be characterised as an ESS interest, or as a
right to shares under Division 13A of the ITAA 1936, when it
is acquired.
Lyra remains employed with Waterworks Co for the five-year
period, and receives rights to 4,000 Waterworks shares in
January 2013, as Waterworks management decides not to
exercise their discretion to provide the benefit in cash
instead. She is now considered to have acquired her ESS
interests in January 2008. In January 2008 her shares would
have been subject to the current employee share scheme rules
(Division 13A of the ITAA 1936).
Lyra now needs to work out when the taxing point for her
rights occurred or will occur under the current employee
share scheme rules.
Once Lyra receives her rights to shares in January 2013, she
is not subject to any restrictions on their disposal.
Lyra remained employed with Waterworks Co over the five-year
period. Since Lyra did not have the ability to sell her
rights during the five years, her first cessation point
would have occurred five years after she acquired the rights
to the shares (when she was no longer subject to any
restrictions on the disposal of the rights).
Lyra now knows that while at acquisition her rights were
subject to the current employee share scheme rules, tax was
deferred on these rights over 1 July 2009. This means that
they will be transitioned into the new employee share scheme
rules.
Lyra will treat her rights as transitional ESS interests.
She will include an amount in her assessable income for the
2012-2013 income year. Her rights are subject to the new
employee share scheme rules, however the taxing point,
refund provisions, foreign employment provisions and CGT
acquisition date are as they would have been under the
current rules.
2. : Employment benefits that later become ESS interests may be taxed
under previous regimes
Dexter is granted a non-transferable right to 8,000 shares
in his employer, Cannonball Co, as a part of his total
employment remuneration package. However, Cannonball
management reserves the right to grant Dexter the cash value
of the shares rather than actual Cannonball Co shares.
Dexter receives this right in December 2006.
Dexter will be able to exercise his right to shares in three
years time, irrespective whether he is still employed by
Cannonball Co at that time.
Dexter ceases employment with Cannonball Co in December
2007.
Dexter receives rights to 8,000 Cannonball shares in
December 2009, as Cannonball management decides not to
exercise their discretion to provide the benefit in cash
instead. He is now considered to have acquired his ESS
interests in December 2006. In December 2006 his shares
would have been subject to the current employee share scheme
rules (Division 13A of the ITAA 1936).
Dexter now needs to work out when the taxing point for his
rights occurred or will occur under the current employee
share scheme rules.
Since Dexter did not have the ability to sell his rights
during the three years, his first cessation point would have
occurred when he ceased employment with Cannonball Co. in
December 2007.
Dexter will seek an amendment of his income tax assessment
for the 2007-2008 income year to include an amount in
relation to these ESS interests in his assessable income.
Dexter is taxed under the current (Division 13A) employee
share scheme rules, as those rules were in force in December
2007.
Current rules continue to apply to non-transitioned shares and rights
414. The current rules will continue to apply to shares or rights which
are not being brought into the new rules. That is, shares or
rights on which tax was paid under Division 13A of the ITAA 1936
will continue to be subject to those rules. The previous rules
contained in section 26AAC of the ITAA 1936 will continue to apply
to shares or rights acquired under those rules which are not being
brought into the new rules. [Schedule 1, item 83, subsection 83A-
10 of the IT(TP)A 1997]
415. Given that tax has already been paid on the untransitioned shares
and rights under the previous regimes, their ongoing application
will provide certainty to employees taxed under these regimes.
Consolidation rules in the current law continue to apply
416. The tax law provides rules to ensure that shares and rights
provided under an employee share scheme are disregarded for the
purposes of establishing whether a company is a wholly-owned
subsidiary of another. These rules ensure that company groups
whose subsidiary companies offer employee share schemes are not
prevented from consolidating for tax purposes merely because the
holding company does not hold 100 per cent of the subsidiary
because of shares or rights provided to employees under an employee
share scheme.
417. Transitional provisions have been included to ensure that the
current rules relating to consolidation, that apply to shares
acquired under Division 13A, continue to apply to shares and
membership interests that it applied to prior to the introduction
to the new law. These provisions apply to both the consolidated
groups and multiple entry consolidated groups (MEC groups).
[Schedule 1, items 84 and 85]
Retrospective regulations will apply
418. Regulations made for the purposes of, or relating to, the new
employee share scheme rules may have retrospective effect from
1 July 2009, if they are made within three months from the date
that these Bills receive Royal Assent. [Schedule 1, item 87]
419. The Government has announced that it will replicate the rules for
valuing unlisted shares or rights in the Regulations as an interim
measure pending the recommendations of the Board of Taxation in
relation to these valuation methods.
420. To ensure that appropriate valuation methods are provided for
unlisted shares and rights acquired or disposed of between
1 July 2009 and the date that these Bills receive Royal Assent, and
to provide certainty to providers and employees participating in
employee share schemes, these Regulations will have retrospective
effect.
421. The general prohibition on retrospective regulations that adversely
affect the rights or liabilities of a taxpayer does not apply to
these Regulations, provided that they are made within three months
of these Bills receiving Royal Assent.
422. This is considered appropriate because the purpose of the
Regulations is to provide certainty to providers and employees
participating in employee share schemes. Draft versions of the
Regulations were made available to the public for comment on the
Treasury website on 14 August 2009.
Consequential amendments
Other amendments
423. There are also amendments tidying up assorted references, headings,
notes and other things that need to be removed or changed because
the employee share scheme rules have been rewritten into the ITAA
1997, and because the terminology used to refer to concepts in the
new employee share scheme rules is different and references must be
updated. [Schedule 1, items 6, 7, 9, 10, 12 to 18, 20 to 22, 24 to
39, 41 to 59, 65, 67 to 79, 81 and 82]
Chapter 2
Non-commercial losses
Outline of chapter
424. Schedule 2 to this Bill amends the Income Tax Assessment Act 1997
(ITAA 1997) to tighten the application of the non-commercial losses
rules in relation to individuals with an adjusted taxable income of
$250,000 or more. These amendments will prevent high income
individuals from offsetting deductions from non-commercial business
activities against their salary, wage or other income.
425. All references are to the ITAA 1997 unless otherwise stated.
Context of amendments
426. The non-commercial losses rules were introduced in 2000, following
recommendations from the Review of Business Taxation. They are
aimed at improving the integrity, fairness and equity of the tax
system, by addressing the opportunity for individuals to avoid tax
by carrying on unprofitable business activities and claiming
deductions for losses arising from such activities against their
other income.
427. Under the current non-commercial losses rules contained in Division
35 of the ITAA 1997, an individual carrying on a business activity
either alone or in partnership has to quarantine losses to the
business activity.
428. Exemptions exist, however, which allow taxpayers to apply losses
from the business activity against their other income in an income
year if the business activity satisfies at least one of four
objective tests in that year, or if the Commissioner of Taxation
(Commissioner) exercises a discretion. The four tests are:
. assessable income test - the assessable income generated
from the activity must be at least $20,000;
. profits tests - the activity must have produced a profit
in three of the last five income years;
. real property test - the reduced cost base value of real
property or interests in real property used on a
continuing basis to carry out the activity is at least
$500,000; and
. other assets test - the reduced cost base of any other
assets used on a continuing basis to carry on the activity
is at least $100,000.
429. If a business activity does not pass any of these tests, the
Commissioner has a discretion to nonetheless allow a taxpayer to
offset the losses against other income, having regard to certain
circumstances. For example, if there are exceptional circumstances
applicable to the business activity that stop it from meeting one
of the four tests. Exceptional circumstances could include adverse
weather conditions, such as drought or flood, that prevent a
farming business from meeting the assessable income test in a
particular year.
430. In addition, another exception is available when the taxpayer is
involved in a primary production or professional arts business
activity, and the taxpayer's total income from other sources is no
greater than $40,000.
431. Currently, if any of the above tests are met, the taxpayer can
deduct all of the expenses from their business activities from both
the business and other income. If all of the tests are failed, the
deductions are limited to the amount of the income from the
business. It does not mean that the costs are not deductible, just
that deductions are quarantined to the particular business
activity. Quarantined deductions can be carried forward to be used
against future income from that business activity or offset against
other income once a test is met.
Consultation
432. An exposure draft of the proposed legislation was released for
public consultation on 26 June 2009. The consultation period
closed on 26 July 2009. Seventeen submissions to the consultation
process were received.
433. Submissions raised concerns around the process for applying to the
Commissioner, and the evidentiary burden for taxpayers applying for
a discretion, including what constituted 'objective evidence'. The
exposure draft has been amended to require applications to be made
in an approved form. The form will help the taxpayer work out what
information is required to be provided to the Commissioner to
assess whether or not to exercise his or her discretion.
434. Submissions also raised concerns about the continued status of
discretions obtained prior to the changes in this Bill;
particularly in relation to 'managed investment schemes'.
Transitional provisions now ensure that all previous discretions
granted by the Commissioner will continue to apply.
435. Consultations also raised the issue of investment allowances under
Division 41 of the ITAA 1997 being quarantined to a business
activity that is otherwise profitable, but because of the
investment allowances makes a tax loss. The exposure draft has
been amended to carve-out those investment allowances for owners of
otherwise profitable businesses.
Summary of new law
436. These amendments recognise that the current non-commercial loss
rules apply in a discriminatory way, because taxpayers with high
incomes are more able to meet one of the four objective tests.
These amendments limit access to the four objective tests to
individuals who meet an income requirement.
437. These amendments also provide the Commissioner with a new
discretion in cases where an individual does not meet the income
requirement, but can nonetheless independently demonstrate that
their business is genuinely commercial.
Comparison of key features of new law and current law
|New law |Current law |
|Individuals must look at |There is no income |
|their adjusted taxable |requirement. |
|income to see if they | |
|meet the income | |
|requirement. This will | |
|determine which tests | |
|apply in relation to | |
|their losses from their | |
|non-commercial business | |
|activity. | |
|The income requirement is| |
|met when an individual | |
|has an adjusted taxable | |
|income of less than | |
|$250,000 in the relevant | |
|income year. | |
|Four objective tests are |Four objective tests are |
|used to work out if a |used to work out if a |
|business activity is |business activity is |
|commercial in nature. |commercial in nature. |
|The objective tests are: |The objective tests are: |
|the assessable income |the assessable income |
|test - the assessable |test - the assessable |
|income generated from the|income generated from the|
|activity must be at least|activity must be at least|
|$20,000; |$20,000; |
|profits test - the |profits test - the |
|activity must have |activity must have |
|produced a profit in |produced a profit in |
|three of the last five |three of the last five |
|income years; |income years; |
|real property test - the |real property test - the |
|reduced cost base value |reduced cost base value |
|of real property or |of real property or |
|interests in real |interests in real |
|property used on a |property used on a |
|continuing basis to carry|continuing basis to carry|
|out the activity is at |out the activity is at |
|least $500,000; and |least $500,000; and |
|other assets test - the |other assets test - the |
|reduced cost base of any |reduced cost base of any |
|other assets used on a |other assets used on a |
|continuing basis to carry|continuing basis to carry|
|on the activity is at |on the activity is at |
|least $100,000. |least $100,000. |
|Not all tests are |All taxpayers can access |
|available to all |all four tests. |
|taxpayers. |Unless one of the |
|If an individual has an |objective tests is met, |
|adjusted taxable income |losses from |
|of less than $250,000 and|non-commercial business |
|one of the four objective|activities are |
|tests is not met, losses |quarantined. |
|from non-commercial | |
|business activities are | |
|quarantined. | |
|If an individual has an | |
|adjusted taxable income | |
|of $250,000 or more, | |
|losses from | |
|non-commercial business | |
|activities are | |
|quarantined. | |
|Any individual with an |Any individual may apply |
|adjusted taxable income |to the Commissioner to |
|of less than $250,000 may|not apply the |
|apply to the Commissioner|non-commercial losses |
|to not apply the |rules where they can |
|non-commercial losses |satisfy the Commissioner |
|rules where they can |that the nature of the |
|satisfy the Commissioner |business activity means |
|that the nature of the |that it has not met, or |
|business activity means |will not meet, the |
|that it has not met, or |objective tests that are |
|will not meet, the |available to them, but |
|objective tests that are |based on an objective |
|available to them, but |expectation, the business|
|based on an objective |activity will produce |
|expectation, the business|assessable income greater|
|activity will produce |than available deductions|
|assessable income greater|or meet one of the tests |
|than available deductions|within a commercially |
|or meet one of the tests |viable period for the |
|within a commercially |industry concerned. |
|viable period for the | |
|industry concerned. | |
|Any individual with an | |
|adjusted taxable income | |
|of $250,000 or more may | |
|apply to the Commissioner| |
|to not apply the | |
|non-commercial losses | |
|rules where they can | |
|satisfy the Commissioner,| |
|based on an objective | |
|expectation, the business| |
|activity will produce | |
|assessable income greater| |
|than available deductions| |
|within a commercially | |
|viable period for the | |
|industry concerned. | |
Detailed explanation of new law
438. The exceptions to the general rules about non-commercial losses are
aimed at providing relief for individuals where certain
characteristics of the business show that it is likely to be
commercial, despite having made a loss in an income year. These
amendments improve the integrity, fairness and equity of the non-
commercial losses rules by recognising that the current exceptions
operate in a discriminatory way because high income individuals are
more able to satisfy the objective tests and use these to avoid
tax.
439. To address this issue, the new law introduces an income requirement
that limits those who can access the objective tests that provide
an exception to the general rule about quarantining non-commercial
losses.
440. Division 35 creates four tests to determine whether a business
activity may be treated as commercial in nature for the tax laws.
The four tests are:
. the assessable income test - the assessable income
generated from the activity must be at least $20,000;
. profits tests - the activity must have produced a profit
in three of the last five income years;
. real property test - the reduced cost base value of real
property or interests in real property used on a
continuing basis to carry out the activity is at least
$500,000; and
. other assets test - the reduced cost base of any other
assets used on a continuing basis to carry on the activity
is at least $100,000.
Income requirement
441. The income requirement prevents individuals with an adjusted
taxable income of $250,000 or more from accessing the existing four
tests.
442. The income requirement is met when, in a given income year, the sum
of an individual's taxable income, reportable fringe benefits,
reportable superannuation contributions and total net investment
losses is less than $250,000. The four amounts that make up the
income requirement, when referred to together, are also known as an
individual's 'adjusted taxable income'. The four amounts that make
up the income requirement are defined in subsection 995-1(1).
[Schedule 2, item 5, subsection 35-10(2D)]
443. When working out if an individual has met the income requirement,
the individual must disregard any excess deductions from any non-
commercial business activity that has excess deductions that are
subject to Division 35. [Schedule 2, item 5, subsection 35-10(2D)]
444. Subsections 35-10(1) and (2A) are amended to allow for the
introduction of the income requirement. [Schedule 2, items 3 and
4, paragraphs 35-10(1)(a) and (2A)(a)]
1.
Jane received $150,000 income from her salaries and wages in
2009-10, but then a promotion increased her salaries and
wages income to $250,000 for 2010-11. She also had $50,000
in reportable superannuation contributions in both years.
She did not have any reportable fringe benefits or total net
investment losses.
She also owns a party planning business, that mostly plans
parties for her friends and family, which had an assessable
income of $30,000 in 2009-10 and 2010-11, but which also had
$45,000 of deductions in both years. It has never made a
profit. Jane's party planning business, therefore, had
excess deductions of $15,000 in 2009-10 and 2010-11. She
does not apply for a discretion.
In 2009-10, Jane can apply the losses from her non-
commercial business against her other income. For 2009-10,
the total of Jane's salaries and wages income and her
reportable superannuation contributions was $200,000, so she
met the income requirement. Jane's party planning business
had excess deductions, but it had an assessable income in
excess of $20,000, so it met the assessable income test, so
she does not have to quarantine her losses from her party
planning business. For 2009-10, Jane applies the $15,000
excess losses from her party planning business against her
other income.
For 2010-11, Jane cannot apply the $15,000 of losses from
her party planning business attributable to the 2010-11
income year because she does not meet the income
requirement. For 2010-11, the total of her salaries and
wages income and her reportable superannuation contributions
is $300,000, so she fails the income requirement. The
$15,000 of excess deductions from 2010-11 are quarantined,
and can only be applied against assessable income from her
party planning business in future income years.
Applying to the Commissioner
445. Individuals who meet the income requirement for the most recent
income year ending before the date of making the application and
whose business does not meet one of the four objective tests, but
who can nonetheless objectively demonstrate that their business is
commercial, can apply to the Commissioner to exercise a discretion
and not apply the non-commercial losses rules. That is, the
existing rules continue to apply to taxpayers with an adjusted
taxable income below $250,000.
446. Section 35-55 is amended to provide another discretion to
the Commissioner for taxpayers who do not meet the income
requirement for the most recent income year before the date of
making the application, but who have excess deductions from a
business that - based on an objective assessment - is a commercial
business. [Schedule 2, items 9 and 11, paragraphs 35-55(1)(b) and
(c)]
447. Individuals who do not meet the income requirement, but who can
nonetheless objectively demonstrate that their business is
commercial, can apply to the Commissioner to exercise a discretion
to not apply the non-commercial losses rules.
1.
In the 2009-10 income year, Jack has a taxable income of
$200,000, reportable superannuation contributions of $50,000
and reportable fringe benefits of $20,000. Jack also owns a
vineyard that is valued at $750,000. The vineyard has
excess deductions of $50,000 this year.
Jack does not meet the income requirement because the sum of
his taxable income, reportable fringe benefits, and
reportable superannuation contributions is $270,000. The
vineyard has never made a profit. Despite that his non-
commercial business activity is being carried on with real
assets worth more than $500,000, he must now apply to the
Commissioner if he wants to apply his non-commercial losses
against his other income.
Jack has obtained an independent assessment that the
vineyard will make assessable income greater than deductions
within seven years. Jack applies to the Commissioner to
exercise a discretion. The Commissioner decides that there
is an objective expectation, based on an independent
assessment, that the vineyard will produce assessable income
greater than available deductions in a given year in a
period that is considered commercially viable for the
industry concerned, and that Jack can apply the $50,000
against his other assessable income in this income year.
448. Before considering whether to exercise a discretion, the
Commissioner must be satisfied that, because of its nature, the
business does not or will not meet one of the four tests (only
applicable for taxpayers that do not meet the income requirement)
and has not produced a profit. For taxpayers with an adjusted
taxable income less than $250,000, they must demonstrate that,
because of its nature, the business activity does not meet any of
the four of the objective tests. For individuals with an adjusted
taxable income of $250,000 or more, they must demonstrate that the
reason they do not or will not make a profit is because of the
nature of the business and not for some other reason which is
peculiar to that individual's particular business.
1.
Sergio and his bother are partners in a successful yacht
building business on Sydney Harbour that makes competition
yachts that are mostly used for an international race that
is held every four years. Sergio does all the design, and
his brother does most of the construction. Sergio is highly
regarded, and has another job as a designer that pays him
salaries and wages that are more than $250,000 every year.
Because the boats are only paid for when they are finished,
the business, in common with other businesses of this kind,
generally makes a loss for three out of every four years.
Over the four year period the business makes a profit.
Sergio wants to apply the losses from the business activity
against his other income, and he applies to the Commissioner
for a discretion.
The Commissioner decides that because of the nature of the
business activity - not the manner in which Sergio and his
brother run the business - it does not produce assessable
income greater than available deductions in a given income
year, but, that based on an objective expectation, it will
produce assessable income greater than available deductions
in a given income year within a timeframe that is
commercially viable for the business concerned. The
Commissioner exercises a discretion.
Approved form
449. To obtain the exercise of the Commissioner's discretion, an
individual will need to complete a form approved by the
Commissioner. The form will assist the Commissioner in determining
whether the discretion should be exercised, by requiring the
individual to provide certain information that will support the
exercise of the discretion. [Schedule 2, item 13, subsection 35-
55(3)]
Objective evidence
450. The application form will require relevant information (including,
where available, evidence from independent sources) to be provided
by the applicant. In particular, the information required by the
form may include:
. details of the nature of the business activity, including
when the business activity commenced to be carried on;
. objective evidence from independent sources demonstrating
that, because of the nature of the business activity, it
does not or will not satisfy the tests that are available
to the taxpayer, or does not produce assessable income
greater than available deductions in a given income year
(whichever is applicable); and
. objective evidence from independent sources that, despite
the business not meeting the available test or tests, the
business does not or will not satisfy the tests that are
available to the taxpayer, or does not produce assessable
income greater than available deductions in a given income
year but will nonetheless meet the tests or produce
assessable income greater than available deductions
(whichever is applicable) in a period of time that is
considered commercially viable for the industry concerned.
451. The individual is required to establish objectively the
commercially viable period for the industry concerned. Evidence of
what the commercially viable period for the specific industry is
may include:
. current or projected information about the market for the
goods or services (prices and demand) that the business
activity produces;
. evidence such as industry articles, statistics, analyses
and market forecasts that support the proposals or
projections made in any business plan;
. evidence on the suitability of the particular business
activity to the location where it is undertaken, such as
soil and climate conditions, markets for the products or
services and transport requirements;
. scientific research or other papers on relevant
industries; and
. evidence supporting the yield and price forecasts.
452. The information relating to the period of time before the business
can make a profit is relevant because the discretion is intended to
be available where there is some inherent feature that the
taxpayer's business activity has in common with other business
activities of that type that prevent it from making a profit in the
short term.
453. The taxpayer is required to establish objectively that the business
is commercial in nature and will become profitable in a
commercially viable timeframe. Objective evidence from independent
sources can include evidence from an individual or organisation
experienced in the relevant industry, such as industry or
regulatory bodies, tertiary institutions, industry specialists,
professional associations, government agencies or other independent
entities with a similar successful business activity. Evidence
from independent sources can also include evidence from business
advisers (such as business plans), financiers and banks.
454. The Commissioner must balance the relative weight given to any
evidence provided in support of an application for the exercise of
a discretion. Nothing in the law requires an individual to obtain
new or additional evidence about their business activity where they
believe the existing evidence that is available to them
demonstrates the business will meet one of the four tests
(applicable for taxpayers that meet the income requirement), or
produce a profit within a period of time that is commercially
viable for the industry concerned. However, such additional
evidence may assist the Commissioner in working out whether to
exercise a discretion.
455. Owners of business activities that, because of their nature, have a
lead time between the commencement of the activity and the
production of assessable income are eligible to apply for the
exercise of the Commissioner's discretion. [Schedule 2, item 13,
note to subsection 35-55(1)]
Exercise of the Commissioner's discretion
456. For taxpayers that meet the income requirement, the Commissioner
may exercise a discretion after an application by a taxpayer, where
the Commissioner is satisfied that the nature of the business means
that, the business has not, and will not, meet the four tests, but
will nonetheless - based on evidence from independent sources -
meet one of the tests or produce assessable income greater
than available deductions, in a timeframe that is considered
commercially viable for the industry concerned.
457. For taxpayers that do not meet the income requirement, the
Commissioner may exercise a discretion after an application by a
taxpayer, where the Commissioner is satisfied that - based on
evidence from independent sources - the business will produce
assessable income greater than available deductions, in a timeframe
that is considered commercially viable for the industry concerned.
1.
Karen carries on a business of horse breeding, training and
selling horses in partnership. The partnership commenced a
breeding program which will, in time, enable the breeding of
high quality, sought-after animals.
It is in the nature of breeding and training horses that
there will be a lead time before a profit can be expected.
Independent evidence from the relevant national association
supports the view that the commercially viable period for
this industry, in view of the intensive training involved,
would be when a horse reaches five to six years of age.
This period added to the gestation period of 11 months
supports a lead time of six to seven years for the industry.
Provided there is an objective expectation that the
partnership business activity will make a tax profit within
this commercially viable period, the Commissioner may
exercise the discretion to allow losses to be claimed.
2.
Tracey carries on a business of primary production from
breeding and selling cattle. Their profit projections
indicate that they do not expect to make a tax profit for
six years.
Independent evidence provided by Tracey indicates the lead
time period begins from the commencement of the activity and
includes the time taken to raise the females to a breeding
age, allowing for the gestation period of those animals to
finish, and finishes when the progeny have reached a
saleable age. On the evidence provided, the period for a
typical business activity of breeding and selling cattle to
become commercially viable is no greater than three years.
Therefore, Tracey will not be able to produce a tax profit
within a period that is commercially viable for the industry
concerned and the Commissioner will not be able to exercise
the discretion to allow the losses.
458. The discretion is not intended to be available in cases where the
failure to make a profit is for reasons other than the nature of
the business, such as, a consequence of starting out small and
needing to build up a client base, or business choices made by an
individual that are not consistent with the ordinary or accepted
practice in the industry concerned - such as the hours of
operation, location, climate or soil conditions, or the level of
debt funding. [Schedule 2, item 13, note to subsection 35-55(1)]
1.
Joe earns in excess of $250,000 and has a substantial rural
property which he and his wife visit most weekends. The
property has a family residence and sheds and, apart from
one area of the property where a few goats are kept, is
otherwise developed with nut trees.
Joe planted a large number of nut trees on the land in 2007,
and has been claiming his losses from this activity, having
passed the real property test in prior years. As his income
is higher than $250,000, Joe applies to the Commissioner
seeking the exercise of the discretion in new paragraph 35-
55(1)(c) to allow him to access his losses in 2009-10.
In support of his application, Joe provides a letter from
the secretary of the Nut Tree Growers' Association that
states that yields from that number and type of trees would
ordinarily be sufficient to allow Joe to make a profit
within about six years. This is the industry norm for
growers of that type of nut tree. However, because the soil
on the property is not very fertile and the site does not
get a lot of sun, Joe accepts that the lead time for his
particular nut-growing activity will be nine years not six
years. Joe otherwise manages his nut tree orchards in
accordance with industry management practices.
Having examined the case, the Commissioner concludes that,
despite the large number of trees on the property and the
fact that the business is being conducted in accordance with
industry management practices, the discretion should not be
exercised in Joe's favour. This is because the lead time
for this activity to become profitable is greater than the
industry norm: the failure to make a profit within a
commercially viable period is due to factors that are
peculiar to Joe's local environment. Despite the fact that
these factors are out of Joe's control, and the fact that
the activities are otherwise carried on in a commercially
viable way, the excessive lead time before making a profit
for Joe's activities are caused by the poor soil quality and
lack of sunlight. The Commissioner does not exercise the
discretion in Joe's favour because there is an excessive
lead time before making a profit, when compared to other
businesses in the industry.
2.
Erin is growing fruit trees in an area where such trees are
not traditionally grown because of the prevailing weather
conditions.
Erin's annual assessable income is greater than $250,000 so
she seeks the exercise of the Commissioner's discretion
under new paragraph 35-55(1)(c). In support of her
application, she has discovered some international research
that claims new horticultural techniques will improve the
commercial viability of growing this type of fruit tree in
this type of environment.
There is no general acceptance amongst Australian experts
that the new techniques would make growing the trees
commercially viable in Australian soils and climatic
conditions. Having examined the case the Commissioner
concludes that, although Erin has some evidence in the form
of a technical article written by an overseas expert, that
evidence does not necessarily translate to the specific
conditions in Australia, and is insufficient to satisfy the
objective expectation requirements of the provision. The
Commissioner concludes that there is no objective
expectation that the activity will make a profit within a
period that is commercially viable for that industry, and
declines to exercise the discretion in her favour.
Relevant income year
459. When the Commissioner, after an application for a discretion from a
taxpayer, is working out what the taxpayer's adjusted taxable
income is in order to work out if the discretion under paragraph 35-
55(1)(b) or (c) should be applied, the Commissioner must look at
the most recent income year that has ended immediately before the
application for the exercise of a discretion by the Commissioner.
[Schedule 2, item 9, paragraph 35-55(1)(b)]
460. The Commissioner may exercise a discretion for one or more income
years. [Schedule 2, item 7, subsection 35-55(1)]
Application and transitional provisions
Carve-out for certain investment allowances
461. The Income Tax (Transitional Provisions) Act 1997 (IT(TP)A 1997) is
amended to not apply the non-commercial losses rules under Division
35 of the ITAA 1997 to a business activity that has greater
available deductions than assessable income in a given income year
only because of the investment allowances that arise because of
Division 41 of the ITAA 1997; which is about the Government's small
business and general business tax break.
462. Investment allowances for certain new business investment were
introduced in 2008 to assist with stimulating economic activity.
Where otherwise profitable businesses that are run by individuals
or partnerships take advantage of the investment allowances, but
are then placed in a tax loss position, the owners being unable to
apply the losses against their other income. To remove the
potentially anomalous result, the law is amended to allow the
application of the losses, despite the non-commercial losses rules.
463. The amendment will only allow losses to be offset against other
income where the loss arises solely because of the deduction
available under Division 41 of the ITAA 1997. In all other cases
the normal non-commercial losses rules will apply.
Grandfathering of existing Commissioner's discretions
464. To remove any doubt about whether a taxpayer that has obtained a
discretion before the commencement of this Bill, the IT(TP)A 1997
is amended to allow any existing discretion to continue to apply,
despite the amendments.
465. These changes will ensure that any discretion that has been applied
by the Commissioner, including about any 'managed investment
scheme' (or in any other case), will continue in effect despite the
amendments.
Application
466. These amendments will commence from the date the Bill receives
Royal Assent. [Clause 2]
467. The amendments will apply to the 2009-10 income year and later
income years. [Schedule 2, item 8]
Consequential amendments
468. The guide to Division 35 is changed to reflect the amendment made
by this Bill. [Schedule 2, item 5, paragraph 35-55(1)(b)]
Chapter 3
Superannuation - Payment of lost member accounts to the Commissioner of
Taxation
Outline of chapter
469. Schedule 3 to this Bill amends the Superannuation (Unclaimed Money
and Lost Members) Act 1999 (S(UMLM) Act) to require superannuation
providers to transfer the balance of a lost member's account to the
Commissioner of Taxation (Commissioner) where: the balance of the
account is less than $200; or the account has been inactive for a
period of five years and the provider is satisfied it will never be
possible to pay an amount to the member.
Context of amendments
470. Part 4 of the S(UMLM) Act sets up, and the regulations establish, a
scheme for dealing with lost members of funds. The scheme is
intended to reduce, at an early stage, the number of accounts which
become unclaimed money by reuniting members with their lost
superannuation.
471. Under the scheme, the trustee of a superannuation fund (or a
retirement savings account provider) must report details of a lost
member's account to the Commissioner. The information is used by
the Commissioner for the purpose of maintaining a lost members
register.
472. Accounts that are reported to the lost members register remain with
their reporting superannuation provider. Superannuation providers
are also permitted to roll lost accounts over to eligible rollover
funds. These accounts are in turn reported to the lost members
register and remain with the eligible rollover fund concerned.
473. Under Part 3 of the S(UMLM) Act, amounts are paid to the
Commissioner as unclaimed monies when a member reaches age 65 and
cannot be found by their superannuation provider, or when a member
dies and the provider cannot ensure the benefit is received by the
person entitled to receive the benefit. Recent changes (to insert
Part 3A) also allow the superannuation of a former temporary
resident to be paid to the Commissioner.
474. Accounts of less than $200 for lost members who are subsequently
found can be cashed tax free from the superannuation system.
However, claiming these accounts can be a cumbersome and time
consuming process. Many superannuation fund members therefore do
not make the effort to claim these accounts.
475. As at 30 June 2008, around 6.4 million lost accounts with a total
value of $12.9 billion were reported on the lost members register.
This represents around one per cent of superannuation assets under
management. These accounts directly impact on the retirement
savings of many individual Australians and also increase
superannuation provider costs that may be passed on to all members.
476. To enhance efficiency in the superannuation system, the Government
announced in the 2009-10 Budget that it will require superannuation
providers to pay the small and the unidentifiable accounts of lost
members to unclaimed monies, with effect from the 2010-11 financial
year.
477. Requiring superannuation providers to pay small and unidentifiable
lost superannuation accounts to unclaimed monies is one of a number
of steps the Government is taking to address the growing problem of
lost superannuation. This measure will also assist providers as
they will no longer need to administer or apply member protection
to small accounts that are transferred. This will improve equity
for other members where costs are apportioned in applying the
member protection rules.
478. Under these changes, there are no additional obligations on
superannuation providers to attempt to locate lost members before
the reporting and payment to the Commissioner. However, many of
these accounts are unlikely to be reclaimed, as the holders are
either unaware of these accounts or have not made the effort to
contact their provider. In any event, individuals who have their
accounts transferred to unclaimed monies will be able to reclaim
these amounts directly from the Commissioner.
479. Former account holders reclaiming their monies are unlikely to be
disadvantaged. Earnings on small accounts would generally be
offset by fees and charges. In comparison, amounts held in
unclaimed monies do not earn interest, and are not subject to fees
and charges.
Summary of new law
480. Schedule 3 amends the S(UMLM) Act by inserting Part 4A. Under Part
4A, superannuation providers are required to transfer, to the
Commissioner, the balances of superannuation accounts which belong
to members who meet the definition of a 'lost member' at an
unclaimed money day and where:
. the balance in the account is less than $200 on that day;
or
. the account has been inactive for a period of five years
and the superannuation provider is satisfied that it will
never be possible to pay an amount to the member.
481. The initial transfer of lost member accounts to the Commissioner
will take place during the 2010-11 financial year. Transfers will
continue to be made for lost member accounts at times to be
determined by the Commissioner.
Comparison of key features of new law and current law
|New law |Current law |
|Superannuation providers |Amounts are paid to the |
|are also required to |Commissioner as unclaimed|
|transfer the accounts of |monies when a member |
|lost members to unclaimed|reaches age 65 and cannot|
|monies where the balance |be found by a |
|of the account is less |superannuation provider, |
|than $200, or where the |when a member dies and |
|account has been inactive|the provider cannot |
|for a period of |ensure the benefit is |
|five years and the |received by the person |
|provider is satisfied it |entitled to receive the |
|will never be possible to|benefit, or when the |
|pay an amount to the |account holder was |
|member. |identified in a section |
| |20C notice (concerning |
| |former temporary |
| |residents). |
Detailed explanation of new law
Key concepts
482. To distinguish between superannuation funds lost member reporting
requirements under Part 4 of the S(UMLM) Act and the payment of
lost member accounts to the Commissioner under Part 4A, the heading
of Part 4 is amended to 'Information about lost members'.
[Schedule 3, item 23]
483. The object of Part 4A is to set out a procedure for dealing with
the small accounts of lost members and inactive accounts of
unidentifiable lost members. [Schedule 3, item 24, section 24A]
Accounts covered by the measure
484. For the purposes of administering the rules in Part 4A of the
S(UMLM) Act, the concept of a 'lost member account' is inserted
into the definition provision at section 8 of the S(UMLM) Act.
[Schedule 3, item 7, section 8]
485. The term 'account' is defined to cover the particular arrangements
that apply for retirement savings accounts [Schedule 3, item 6,
section 8]. The term account has its common meaning for accounts
other than retirement savings accounts.
486. 'Lost member account' means an account with a superannuation
provider where the member on whose behalf the account is held is a
lost member (according to the meaning already given by section 22
of the S(UMLM) Act) and:
. the balance of the account is less than $200 (small
accounts); or
. the provider has not received an amount in respect of the
member within the last five years and the provider is
satisfied, having regard to the information reasonably
available to the provider, that it will never be possible
for the provider to pay an amount to the member (inactive
accounts of unidentifiable members).
[Schedule 3, item 24, section 24B]
487. Accounts belonging to a lost member that support or relate to a
defined benefit interest (as defined by section 292-175 of the
Income Tax Assessment Act 1997 (ITAA 1997)) are excluded from the
measure. [Schedule 3, item 24, paragraph 24B(1)(c)]
1.
A member is reported on the lost members register and no
amounts have been received in respect of the member within
the last five years. The only identifiable record held by a
superannuation provider in respect of the member is the
member's name (that is, it does not have other member
details such as address, date of birth, employer information
or tax file numbers (TFNs)). Even if the member were to
subsequently contact the fund and provide valid proof of
identity documentation, the provider - on the basis of the
meagre information available from its records - could not be
satisfied that the individual is the person on whose behalf
the account was opened. The account is not a defined
benefit interest. The account is an inactive account of an
unidentifiable member and is therefore a lost member
account.
2.
A superannuation provider has an account, that is not a
defined benefit interest, for which it is satisfied it will
never be able to make a payment to the member due to the
sparse information available. The member has not made
personal, or received employer contributions, to the account
for more than five years; however, earnings have been
credited to the account. The account is still a lost member
account as it satisfies the definition of an 'inactive
account of an unidentifiable member'.
Unclaimed money
488. The simplified outline of the S(UMLM) Act is being amended to
reflect the amendments being made to that Act by Schedule 3.
[Schedule 3, items 1 to 5, paragraphs 6(a), (ca), (e) and 6(ea) and
section 7]
489. The definitions of 'non-member spouse', 'payment split', and
'splittable payment' are removed from subsections 12(3) and 13(1B)
of the S(UMLM) Act and consolidated into section 8. The
definitions continue to have the same meanings as in Part VIIIB of
the Family Law Act 1975. [Schedule 3, items 8, 9, 11 and 13,
section 8, subsections 12(3) and 13(1B)]
490. The definition of 'scheduled statement day' is amended to include a
statement required by Part 4A of the S(UMLM) Act. [Schedule 3,
item 10, section 8]
491. A minor technical amendment replaces references in the S(UMLM) Act
of 'for at least 2 years' with 'within the last 2 years' to provide
consistent terminology in the Act. [Schedule 3, items 12 and 14,
paragraphs 12(1)(c) and 14(c)]
Dates for statements and payments of lost member accounts
492. For the purposes of the S(UMLM) Act, the Commissioner is able to
specify unclaimed money days by legislative instrument. The
Commissioner may also specify the scheduled statement day that
relates to the unclaimed money day by legislative instrument.
These days, as specified by the Commissioner, will apply for the
purposes of Part 4A. [Schedule 3, items 15 and 16, paragraphs
15A(a) and (b)]
Statement of lost member accounts
493. A superannuation provider is required, by section 24C of the
S(UMLM) Act, to give to the Commissioner, by the end of the
scheduled statement day that relates to an unclaimed money day, a
statement in relation to all lost member accounts as at the end of
the unclaimed money day.
494. The Commissioner may, under the Taxation Administration Act 1953
(TAA 1953), defer the time for the superannuation provider to give
the statement of unclaimed money. If the information is not given
by the required time, the TAA 1953 provides for offences and
administrative penalties. [Schedule 3, item 24, subsections 24C(1)
and (5)]
495. This requirement under section 24C does not apply to a
superannuation provider which is the trustee of a state or
territory public sector superannuation scheme as defined in
subsection 18(7) of the S(UMLM) Act and which gives a statement to
a state or territory authority as provided for in section 18.
[Schedule 3, item 24, subsection 24C(1) and section 24H]
496. A statement under section 24C will be required to be given in a
form approved by the Commissioner. The statement can contain
information required by the Commissioner in respect of lost member
account administration, and require certain TFNs as provided for by
subsection 25(4).
497. Such reporting may include information that allows the Commissioner
to apply the correct taxation treatment to a payment of unclaimed
money made in respect of a person under section 24G of the S(UMLM)
Act.
498. If the statement required to be given by a superannuation provider
under subsection 24C(1) includes false or misleading statements,
the TAA 1953 provides for offences and administrative penalties.
This will make the penalties for lost member accounts consistent
with broader taxation administration. [Schedule 3, item 24,
subsection 24C(1)]
499. Where a statement is required by subsection 24C(1) and there are no
lost member accounts for any member (or holder in the case of a
retirement savings account provider) at the end of the unclaimed
money day, the statement must say so. [Schedule 3, item 24,
subsection 24C(2)]
500. The requirement for a superannuation provider to give a statement
under section 24C does not apply to a regulated superannuation fund
with fewer than five members if there are no lost member accounts
at the end of the unclaimed money day in that fund. That is, small
Australian Prudential Regulation Authority regulated superannuation
funds will only be required to give to the Commissioner such a
statement if they have lost member accounts at the end of an
unclaimed money day. [Schedule 3, item 24, subsection 24C(4)]
501. The statement of lost member accounts required to be given by a
superannuation provider under subsection 24C(1) to the Commissioner
will include information about any account that, between the end of
the unclaimed money day and the day on which the superannuation
provider gives the statement to the Commissioner, ceases to be a
lost member account because the member ceases to be a lost member.
[Schedule 3, item 24, subsection 24C(3)]
1.
On 30 June 2010 Lidia's superannuation provider considered
the amount payable to Lidia was a lost member account as it
satisfied all the conditions of subsection 24B(1) of the
S(UMLM) Act. The amount was due and payable before 1
October 2010. However on 31 July 2010 Lidia made a
contribution to her account, resulting in the criterion of
paragraph 24B(1) no longer being satisfied.
Although the amount payable to Lidia was no longer a lost
member account, Lidia's superannuation provider is still
required to include, in the statement of lost member
accounts, information in relation to the account.
502. Superannuation providers are not required to give a statement to
the Commissioner under section 24C where the amounts payable relate
to unclaimed money or certain former temporary residents for which
the Commissioner has given notice to the superannuation provider
under section 20C. [Schedule 3, item 24, subsection 24C(6)]
1.
Nadia was a former temporary resident who last left
Australia in 2005. On 30 June 2010 Nadia's superannuation
provider considered the amount payable to Nadia was
unclaimed money and a lost member account as it satisfied
all the conditions of subsections 12(1) and 24B(1) of the
S(UMLM) Act. The amount was due and payable on 1 October
2010 under subsections 17(1) and 24E(1) of that Act.
However on 1 August 2010 the Commissioner gave a notice
(former temporary resident notice) to Nadia's superannuation
provider under section 20C of the S(UMLM) Act. As a result
Nadia's superannuation provider was required to pay an
amount to the Commissioner in accordance with section 20F of
that Act and no longer required to pay the amount under
subsection 17(1) or 24E(1). That is, the priority for
statements and payments to the Commissioner for amounts
payable under the S(UMLM) Act will be:
1. Payment of unclaimed superannuation of former temporary
residents.
2. Payment of unclaimed money.
3. Payment of lost member accounts.
Errors or omissions
503. Where a superannuation provider is required to give the
Commissioner a statement under section 24C of the S(UMLM) Act and
the provider becomes aware of a material error in, or omission
from, that statement, the provider must give the Commissioner the
corrected or omitted information in the approved form no later than
30 days after becoming aware of the error or omission.
504. These provisions provide greater certainty to the Commissioner that
superannuation providers have correctly fulfilled their reporting
obligations under the S(UMLM) Act.
505. A superannuation provider's obligations to correct an error or
omission remain even if the Commissioner becomes aware of the error
or omission, including where the Commissioner takes action as a
result of such a discovery (for example, by refunding under section
24J of the S(UMLM) Act an overpayment made by a superannuation
provider).
506. The Commissioner may, under section 388-55 in Schedule 1 to the TAA
1953, defer the time for the superannuation provider to give the
information. If the information is not given by the required time,
the TAA 1953 provides for offences and administrative penalties.
The operation of penalties for lost member accounts is consistent
with broader taxation administration. [Schedule 3, item 24,
section 24D]
Payment of lost member accounts to the Commissioner
507. A superannuation provider must, under subsection 24E(1) of the
S(UMLM) Act, pay to the Commissioner the amount worked out under
subsection 24E(3), in respect of an account that is a lost member
account at the end of the unclaimed money day and the member on
whose behalf the account is held is still a lost member as at the
time (the calculation time), immediately before the earlier of the
time (if any) the payment is made and the time at which the payment
is due and payable.
1.
The balance of a lost member's account in a fund on the
unclaimed money day is $195. Therefore it is an account
that must be paid to the Commissioner. Between the
unclaimed money day and the scheduled statement day the fund
credits the account with earnings of $6, bringing the
balance to $201.
However as the value of the account was still below $200 on
the unclaimed money day - the account must still be paid to
the Commissioner even though its balance is now greater than
$200.
2.
Continuing from Example 3.3, Lidia's superannuation provider
is not required to pay an amount to the Commissioner under
subsection 24E(1) of the S(UMLM) Act on 1 October 2010 in
relation to Lidia, as the lost member account in question
ceased to be a lost member account between the end of the
unclaimed money day and the day on which the superannuation
provider gives the statement of unclaimed money to the
Commissioner.
508. The amount the provider must pay the Commissioner is due and
payable at the end of the scheduled statement day for the relevant
unclaimed money day.
509. The Commissioner may, under section 255-10 in Schedule 1 to the TAA
1953, defer the time at which the amount is due and payable by the
superannuation provider. The amount the provider must pay is a tax-
related liability for the purposes of the TAA 1953 and as such a
general interest charge and administrative penalties are connected
with such liabilities. The amendments in this Bill make penalties
operate for lost member accounts consistent with broader taxation
administration. [Schedule 3, item 24, subsection 24E(1)]
510. Section 24J of the S(UMLM) Act allows the Commissioner to refund an
overpayment by the provider. [Section 3, item 24,
subsection 24J(1)]
511. The requirements of subsection 24E(1) do not apply to a
superannuation provider which is a trustee of a state or territory
public sector superannuation scheme which gives a statement and
makes a payment to a state or territory authority as provided for
in section 18 of the S(UMLM) Act. [Schedule 3, item 24, subsection
24E(1) and section 24H]
512. The amount due and payable under subsection 24E(1) of the S(UMLM)
Act is the amount that would have been due and payable by the
superannuation provider if the lost member had requested that the
balance be rolled over to a complying superannuation fund (within
the meaning of the Superannuation Industry (Supervisory) Act 1993).
Thus the amount payable would be determined after the application
of returns and exit fees to the account. [Schedule 3, item 24,
subsections 24E(2) and (3)]
1.
A superannuation provider would normally credit earnings to
an account and debit an exit fee if the member's account was
rolled over to a complying superannuation fund. The amount
payable to the Commissioner is the balance of the account
after the earnings are credited and the exit fee is debited.
513. The amount of a payment must only take account of the person's
entitlement to payment remaining after any reduction by a payment
split under Part VIIIB of the Family Law Act 1975 (disregarding
subsection 90MB(3) of that Act). [Schedule 3, item 24, paragraph
24E(4)(a)]
514. The superannuation provider must also pay an amount to the
Commissioner in respect of the non-member spouse, equivalent to the
amount of the reduction applied to the lost member's entitlement.
[Schedule 3, item 24, paragraphs 24E(4)(b), (c) and (d)]
515. Subsection 24E(1) does not require the superannuation provider to
pay the Commissioner an amount that satisfied the conditions
outlined in subsection 24B of the S(UMLM) Act if the amount relates
to either unclaimed money or a person for whom the Commissioner has
given notice to the provider under section 20C of that Act. This
is because unclaimed money is payable under section 17 of that Act
and the unclaimed money of former temporary residents is payable to
the Commissioner under section 20F of that Act. [Schedule 3, item
24, subsection 24E(5)]
516. Superannuation providers are discharged from further liability for
amounts paid under section 24E. [Schedule 3, item 24, subsection
24E(6)]
517. Accounts with nil balances or below nil balances as at the end of
the calculation day can be ignored. That is, if the amount to be
paid to the Commissioner is nil or below nil then no amount is
payable to the Commissioner in respect of the lost member account.
[Schedule 3, item 24, subsection 24E (7)]
518. A superannuation provider is liable to pay a general interest
charge on the amount in respect of lost member accounts that is due
and payable under section 24E and remains unpaid after it is due
and payable. [Schedule 3, item 24, subsection 24F(1)]
519. The S(UMLM) Act provides that an offence is committed if a person
by their conduct breaches a requirement under section 24E.
[Schedule 3, item 24, subsection 24F(2)]
Payment by the Commissioner in respect of a person for whom an amount has
been paid to the Commissioner
520. The Commissioner must pay an amount in respect of a person if a
superannuation provider paid an amount to the Commissioner under
subsection 24E(1) of the S(UMLM) Act in respect of that person and
the Commissioner is satisfied that an amount can be paid in respect
of that person under subsection 24G(2) of that Act. The
Commissioner may either be satisfied on receipt of an application
in the approved form or by the Commissioner's own initiative.
[Schedule 3, item 24, subsection 24G(1)]
521. Money for payments under subsection 24G(2) of the S(UMLM) Act is
appropriated by section 16 of the TAA 1953.
522. If the Commissioner can pay an amount, in respect of a person who
is still alive, because the conditions in subsection 24G(1) are
satisfied, then the Commissioner must pay the amount to the person
if the person has reached eligibility age or the amount is less
than $200, unless the person directs the Commissioner to pay the
amount to a fund that is a complying superannuation plan. In the
case of payments to a fund, the Commissioner can only pay to a
single fund. [Schedule 3, item 24, paragraphs 24G(2)(a) and (d)]
1.
If the Commissioner has received an amount of $150 from Fund
A and $190 from Fund B, the Commissioner can pay each amount
directly to the person as each amount is less than $200.
This is the case even if the person is younger than the
eligibility age of 65.
523. If, after the death of the person, the Commissioner can pay an
amount in respect of a person because the conditions in subsection
24G(1) are satisfied and the Commissioner is satisfied that the
superannuation provider, had it not paid the amount to the
Commissioner, would have been required to pay a death benefit
amount or amounts to one or more death beneficiaries as a result of
the person's death, then the Commissioner must pay the amount to
that beneficiary or beneficiaries. If the Commissioner cannot be
so satisfied, the Commissioner must pay the amount to the person's
legal personal representative. [Schedule 3, item 24, paragraphs
24G(2)(b) and (c)]
1.
A lost member account in respect of Andrew was paid to the
Commissioner by the superannuation provider under subsection
24E(1) of the S(UMLM) Act. At that time the superannuation
provider also provided details about the binding death
benefit nomination that Andrew had which nominated his wife
Thea as the death beneficiary. After Andrew died, Thea
contacted the Australian Taxation Office to inquire about
lost or unclaimed superannuation held for her deceased
husband either in a fund or by the Commissioner. The
Commissioner was able to be satisfied through documents
provided by Thea that Andrew's superannuation provider would
have been required to pay Thea a death benefit had it not
paid an amount in respect of Andrew to the Commissioner as a
lost member account. As the relevant conditions of
paragraph 24G(2)(b) of the S(UMLM) Act apply, the
Commissioner must make a payment to Thea in accordance with
subsection 24G(3) of that Act.
524. A formula is applied to death beneficiary payment cases covered by
paragraph 24G(2)(b). If there is only one death beneficiary the
whole of the amount is payable to that beneficiary. However where
there is more than one death beneficiary the formula acts as a
proportioning rule to determine how much of the amount the
Commissioner has available to pay, is payable to each death
beneficiary. [Schedule 3, item 24, subsection 24G(3)]
525. Section 24G does not apply to an amount that is to be, or has been,
taken into account in determining whether the Commissioner must
make a payment under section 20H. [Schedule 3, item 24,
subsection 24G(4)]
Refunds, overpayments and returns
526. Similar to the conditions in section 20K of the S(UMLM) Act, where
an amount is to be refunded by the Commissioner under section 24J,
the Commissioner must pay the relevant amount to the superannuation
provider which made the underlying overpayment (or, if that
superannuation provider no longer exists, to the provider of a
successor fund). [Schedule 3, item 24, subsection 24J(2)]
527. Money for payments under subsection 24J(2) of the S(UMLM) Act is
appropriated by section 16 of the TAA 1953.
528. Section 24K of the S(UMLM) Act allows the Commissioner to recover
an overpayment that results from a payment made, or purportedly
made, under Part 4A in respect of a person in a similar manner as
provided for by section 20L for an overpayment made under Part 3A
(that is, payment of unclaimed money of former temporary
residents). [Schedule 3, item 24, section 24K]
529. Before recovering an overpayment the Commissioner must give the
debtor a written notice about the proposed recovery and specify the
amount to be recovered. Prescribing the details to be covered by
the written notice gives the Commissioner flexibility to alter the
notice to allow for changing circumstances. [Schedule 3, item 24,
paragraph 24K(4)(a)]
530. The notice in section 24K is not a 'legislative instrument' within
the definition in section 5 of the Legislative Instruments Act 2003
because it does not have a legislative character which determines
or alters the content of the law; it is merely declaratory of the
law and causes the law to be applied. [Schedule 3, item 24,
subsection 24K(8)]
531. The S(UMLM) Act provides that if a superannuation provider cannot
credit a payment made by the Commissioner under subsection 24G(2)
within a certain period to an account for the benefit of the
person, then the superannuation provider must return the payment to
the Commissioner. This is similar to section 20M of the S(UMLM)
Act in relation to payments made by the Commissioner under Part 3A
(that is, payment of unclaimed money of former temporary
residents).
532. The amount the provider must pay is a tax-related liability for the
purposes of the TAA 1953 and the Commissioner can deal with the
amount in a way that is consistent with broader taxation
administration, including deferring the time that the amount is due
and payable and applying a general interest charge and
administrative penalties in connection with such liabilities.
[Schedule 3, item 24, section 24L]
Administrative matters
Unclaimed and lost member registers
533. The register of unclaimed money will now also contain particulars
of the lost member accounts paid to the Commissioner under section
24E of the S(UMLM) Act. [Schedule 3, item 17, paragraphs 19(1)(e)
and (f)]
534. Other minor cross referencing amendments are made to section 20H of
the S(UMLM) Act. [Schedule 3, items 18 to 22, section 20H]
Information, access and records
535. Schedule 3 amends section 25 of the S(UMLM) Act to allow the TFN of
the superannuation provider, the fund, and a member of the fund to
be provided to the Commissioner for the purposes of section 24C.
[Schedule 3, item 25, subsection 25(4)]
536. Section 29 of the S(UMLM) Act is amended to allow the Commissioner
to request the TFN of a person making an application for an amount
which has been paid to the Commissioner under subsection 24G(1).
[Schedule 3, item 26, paragraph 29(1)(aa)]
Taxation administration
537. Consequential amendments are made to the TAA 1953 so that a
superannuation provider is liable to pay a general interest charge
on an amount in respect of a lost member account that is due and
payable under sections 24F and 24L of the S(UMLM) Act and remains
unpaid after it is due and payable. This amendment will make the
operation of the lost member account provisions in respect of
payments to the Commissioner consistent with unclaimed money and
broader taxation administration. [Schedule 3, item 41, subsection
8AAB(5) of the TAA 1953]
538. Consequential amendments are made to subsection 250-10(2) of the
TAA 1953 so that an amount a superannuation provider must pay under
section 24E or 24L of the S(UMLM) Act is a tax-related liability
for the purposes of administrative penalties and offences that need
to be connected with such liabilities. The amendments make the
operation of the penalties and offences for the lost member
accounts paid to the Commissioner consistent with unclaimed money
and broader taxation administration. A minor technical correction
is also made to subsection 250-10(2) of the TAA 1953. [Schedule 3,
items 42 and 43, subsection 250-10(2) in Schedule 1 to the
TAA 1953]
Financial transaction reports
539. Under the Financial Transaction Reports Act 1988 if a cash dealer
does not have certain information about an account, the account is
blocked and withdrawals from such an account can give rise to an
offence under that Act. However, this does not apply to certain
withdrawals made in accordance with the S(UMLM) Act, including the
payment of lost member accounts to the Commissioner. The Financial
Transaction Reports Act 1988 is amended to reflect Part 4A of the
S(UMLM) Act. [Schedule 3, item 27, paragraph 18(4B)(ca) of the
Financial Transaction Reports Act 1988]
Compensation arrangements
540. If the operation of these amendments would result in an
acquisition of property from a person otherwise than on just terms,
and the Commonwealth and the person cannot agree on the amount of
the compensation, the person may institute proceedings in a court
of competent jurisdiction for the recovery from the Commonwealth of
such reasonable amount of compensation as the court determines.
[Schedule 3, item 24, section 24M]
Income tax amendments
541. Consequential amendments are made to the ITAA 1997 to ensure
payments made by the Commissioner under section 24G of the S(UMLM)
Act in respect of a person for whom an amount has been paid to the
Commissioner under section 24E of the S(UMLM) Act will be treated
and taxed as if they were paid from a complying superannuation
fund. [Schedule 3, items 28 to 40, section 301-125,
subsections 307-5(1), 307-142(1) to (3), 307-300(1) to (3), 307-
350(2B), and paragraph 307-120(2)(e) of the ITAA 1997]
Application and saving provisions
542. The amendments made by Schedule 3 apply in relation to the last
unclaimed money day occurring before 1 July 2010 and later
unclaimed money days. [Schedule 3, item 44]
543. If, before the commencement of Schedule 3, regulations made for the
purposes of paragraph 18B(4)(a) of the S(UMLM) Act were in force,
the regulations have effect, from that commencement, as if they had
also been made for the purposes of paragraph 24K(4)(a) of that Act,
as inserted by Schedule 3. These regulations deal with written
notices from the Commissioner to debtors. [Schedule 3, item 45]
Do not remove section break.
Schedule 1: Employee share schemes
|Bill reference |Paragraph |
| |number |
|Item 1, section 83A-1 |1.83 |
|Item 1, paragraph 83A-5(a) |1.87 |
|Item 1, paragraph 83A-5(b) |1.85 |
|Item 1, subsection 83A-10(1) |1.92, 1.276 |
|Item 1, subsection 83A-10(2) |1.90, 1.319 |
|Item 1, section 83A-15 and subsection |1.101 |
|83A-25(1) | |
|Item 1, subsection 83A-20(1) |1.99 |
|Item 1, subsection 83A-20(2) |1.104 |
|Item 1, subsection 83A-20(2) and |1.142 |
|paragraph 83A-105(1)(a) | |
|Item 1, subsection 83A-25(2) |1.105 |
|Item 1, subsections 83A-25(2) and 83A-110(2)|1.351 |
|Item 1, section 83A-30 |1.211 |
|Item 1, section 83A-35 |1.114 |
|Item 1, subsections 83A-35(1) and paragraph |1.115 |
|83A-35(2)(a) | |
|Item 1, paragraph 83A-35(2)(b) |1.117 |
|Item 1, subsection 83A-35(3) |1.118 |
|Item 1, subsection 83A-35(4) |1.120 |
|Item 1, subsection 83A-35(5) and paragraph |1.321 |
|83A-105(1)(b) | |
|Item 1, subsection 83A-35(6) |1.122 |
|Item 1, subsection 83A-35(7) |1.126 |
|Item 1, subsection 83A-35(8) |1.129 |
|Item 1, subsection 83A-35(9) |1.133 |
|Item 1, section 83A-100 |1.137 |
|Item 1, subsection 83A-105(1) |1.140 |
|Item 1, paragraphs 83A-105(1)(b) and (c) and|1.163 |
|subsection 83A-35(4) | |
|Item 1, paragraphs 83A-105(1)(b) and (c) and|1.169 |
|subsection 83A-35(9) | |
|Item 1, subsection 83A-105(2) |1.165 |
|Item 1, subsection 83A-105(3) |1.155 |
|Item 1, paragraph 83A-105(4)(a) |1.175 |
|Item 1, paragraphs 83A-105(1)(b) and (c) |1.187 |
|Item 1, subparagraph 83A-105(4)(b)(i) |1.177 |
|Item 1, subparagraph 83A-105(4)(b)(ii) |1.178 |
|Item 1, subparagraph 83A-105(4)(b)(iii) |1.180 |
|Item 1, paragraph 83A-105(4)(c) and |1.183 |
|subsection 83A-105(5) | |
|Item 1, subsection 83A-110(1) |1.144 |
|Item 1, subsection 83A-110(2) |1.147 |
|Item 1, subsections 83A-115(1), (2 and (4) |1.190 |
|to (6) | |
|Item 1, subsections 83A-115(3) and |1.201 |
|83A-120(3) | |
|Item 1, subsections 83A-120(1), (2) and (4) |1.198 |
|to (7) | |
|Item 1, section 83A-125 |1.211 |
|Item 1, subsection 83A-130(1) |1.246 |
|Item 1, subsections 83A-130(2) and (4) |1.250 |
|Item 1, subsection 83A-130(3) |1.259 |
|Item 1, subsection 83A-130(5) |1.261 |
|Item 1, subsection 83A-130(6) |1.262 |
|Item 1, subsections 83A-130(7) and (8) |1.264 |
|Item 1, paragraph 83A-130(9)(a) |1.263 |
|Item 1, subparagraphs 83A-130(9)(b)(i) and |1.265 |
|(ii) | |
|Item 1, section 83A-200 |1.337 |
|Item 1, subsection 83A-205(1) |1.338 |
|Item 1, subsections 83A-205(2) and (3) |1.339 |
|Item 1, subsection 83A-205(4) |1.341 |
|Item 1, section 83A-210 |1.345 |
|Item 1, section 83A-305 |1.267, 1.270 |
|Item 1, section 83A-310 |1.330 |
|Item 1, section 83A-315 |1.110 |
|Item 1, subsections 83A-320(1), (2) and (4) |1.277 |
|Item 1, subsection 83A-320(3) |1.278 |
|Item 1, section 83A-325 |1.373 |
|Item 1, section 83A-330 |1.130, 1.376 |
|Item 1, subsection 83A-335(1) |1.377 |
|Item 1, subsection 83A-335(2) |1.380 |
|Item 1, subsection 83A-335(3) |1.381 |
|Item 1, section 83A-340 |1.367 |
|Item 2, subsections 14-155(1) and (3) in |1.300 |
|Schedule 1 to the TAA 1953, and clause 3 of | |
|the Income Tax (TFN Withholding Tax (ESS)) | |
|Bill 2009 | |
|Item 2, subsection 14-155(2) in Schedule 1 |1.309 |
|to the TAA 1953 | |
|Item 2, subsection 14-155(4) in Schedule 1 |1.311 |
|to the TAA 1953 | |
|Item 2, section 14-160 in Schedule 1 to the |1.304 |
|TAA 1953 | |
|Item 2, section 14-165 in Schedule 1 to the |1.312 |
|TAA 1953 | |
|Item 2, section 14-170 in Schedule 1 to the |1.314 |
|TAA 1953 | |
|Item 2, section 14-175 in Schedule 1 to the |1.316 |
|TAA 1953 | |
|Item 2, section 14-180 in Schedule 1 to the |1.317 |
|TAA 1953 | |
|Items 3 and 4, subsection 16-70(3) and |1.318 |
|section 16-80 in Schedule 1 to the TAA 1953 | |
|Item 5, section 392-1 in Schedule 1 to the |1.281 |
|TAA 1953 | |
|Item 5, subsection 392-5(1) in Schedule 1 to|1.287 |
|the TAA 1953 | |
|Item 5, subsection 392-5(2) in Schedule 1 to|1.289 |
|the TAA 1953 | |
|Item 5, subsection 392-5(3) in Schedule 1 to|1.290 |
|the TAA 1953 | |
|Item 5, subsection 392-5(4) in Schedule 1 to|1.291 |
|the TAA 1953 | |
|Item 5, subsections 392-5(5) and (7) in |1.292 |
|Schedule 1 to the TAA 1953 | |
|Item 5, subsection 392-5(6) in Schedule 1 to|1.307 |
|the TAA 1953 | |
|Item 5, subsection 392-5(6) in Schedule 1 to|1.293 |
|the TAA 1953 | |
|Item 5, section 392-10 in Schedule 1 to the |1.294, 1.371 |
|TAA 1953 | |
|Item 5, section 392-15 in Schedule 1 to the |1.297 |
|TAA 1953 | |
|Items 6, 7, 9, 10, 12 to 18, 20 to 22, 24 to|1.423 |
|39, 41 to 59, 65, 67 to 79, 81 and 82 | |
|Item 8, paragraphs 136(1)(h) and (ha) |1.94 |
|Item 11, subsection 21A(7) of the ITAA 1936 |1.95 |
|and item 23, paragraph 15-2(3)(e) | |
|Item 19, item 30 in the table in subsection |1.328, 1.387 |
|170(10AA) of the ITAA 1936 | |
|Item 19, item 35 in the table in subsection |1.370, 1.389 |
|170(10AA) of the ITAA 1936 | |
|Item 40, subsection 130-75 |1.203 |
|Item 40, subsection 130-80(1) |1.207 |
|Item 40, subsection 130-80(2) |1.235 |
|Item 40, subsection 130-80(3) |1.243 |
|Item 40, subsection 130-80(4) |1.145, 1.233, |
| |1.236 |
|Item 40, paragraph 130-80(4)(a) |1.335 |
|Item 40, paragraph 130-80(4)(b) |1.336 |
|Item 40, subsections 130-85(1) and (2) |1.218 |
|Item 40, subsection 130-85(3) |1.240 |
|Item 40, subsection 130-85(4) |1.216 |
|Item 40, subsection 130-90(1) |1.225 |
|Item 40, subsection 130-90(2) |1.228 |
|Item 40, section 130-95 |1.214 |
|Item 40, paragraphs 130-100(a) and (d) to |1.242 |
|(f) | |
|Item 40, paragraph 130-100(b) |1.239 |
|Item 40, paragraph 130-100(c) |1.241 |
|Items 60 and 61 and 63 and 64 |1.366 |
|Item 62 |1.363 |
|Item 66, section 960-415 |1.109 |
|Item 80, subsection 286-75(2BA) in Schedule |1.288 |
|1 to the TAA 1953 | |
|Item 83, paragraph 83A-5(1)(a) of the |1.391 |
|IT(TP)A 1997 | |
|Item 83, paragraph 83A-5(1)(b) of the |1.392 |
|IT(TP)A 1997 | |
|Item 83, paragraph 83A-5(4)(a) of the |1.399 |
|IT(TP)A 1997 | |
|Item 83, paragraph 83A-5(4)(b) of the |1.395 |
|IT(TP)A 1997 | |
|Item 83, paragraph 83A-5(4)(c) of the |1.396 |
|IT(TP)A 1997 | |
|Item 83, paragraph 83A-5(4)(d) of the |1.398 |
|IT(TP)A 1997 | |
|Item 83, paragraph 83A-5(4)(e) of the |1.400 |
|IT(TP)A 1997 | |
|Item 83, subparagraph 83A-5(4)(f)(i) of the |1.403 |
|IT(TP)A 1997 | |
|Item 83, subparagraph 83A-5(4)(f)(ii) of the|1.407 |
|IT(TP)A 1997 | |
|Item 83, paragraph 83A-5(4)(g) of the |1.402 |
|IT(TP)A 1997 | |
|Item 83, subsection 83A-10 of the IT(TP)A |1.414 |
|1997 | |
|Item 83, section 83A-15 of the IT(TP)A 1997 |1.413 |
|Items 83 and 86, subsections 83A-5(2) and |1.394 |
|(3) of the IT(TP)A 1997 | |
|Items 84 and 85 |1.417 |
|Item 87 |1.418 |
Schedule 2: Non-commercial losses
|Bill reference |Paragraph |
| |number |
|Items 3 and 4, paragraphs 35-10(1)(a) and |2.21 |
|(2A)(a) | |
|Item 5, subsection 35-10(2D) |2.19, 2.20 |
|Item 5, paragraph 35-55(1)(b) |2.45 |
|Item 7, subsection 35-55(1) |2.37 |
|Item 8 |2.44 |
|Item 9, paragraph 35-55(1)(b) |2.36 |
|Items 9 and 11, paragraphs 35-55(1)(b) and |2.23 |
|(c) | |
|Item 13, note to subsection 35-55(1) |2.32, 2.35 |
|Item 13, subsection 35-55(3) |2.26 |
Schedule 3: Lost members' superannuation
|Bill reference |Paragraph |
| |number |
|Items 1 to 5, paragraphs 6(a), (ca), (e) and|3.20 |
|6(ea) and section 7 | |
|Item 6, section 8 |3.17 |
|Item 7, section 8 |3.16 |
|Items 8, 9, 11 and 13, section 8, |3.21 |
|subsections 12(3) and 13(1B) | |
|Item 10, section 8 |3.22 |
|Items 12 and 14, paragraphs 12(1)(c) and |3.23 |
|14(c) | |
|Items 15 and 16, paragraphs 15A(a) and (b) |3.24 |
|Item 17, paragraphs 19(1)(e) and (f) |3.65 |
|Items 18 to 22, section 20H |3.66 |
|Item 23 |3.14 |
|Item 24, section 24A |3.15 |
|Item 24, section 24B |3.18 |
|Item 24, paragraph 24B(1)(c) |3.19 |
|Item 24, subsection 24C(1) |3.30 |
|Item 24, subsections 24C(1) and (5) |3.26 |
|Item 24, subsection 24C(1) and section 24H |3.27 |
|Item 24, subsection 24C(2) |3.31 |
|Item 24, subsection 24C(3) |3.33 |
|Item 24, subsection 24C(4) |3.32 |
|Item 24, subsection 24C(6) |3.34 |
|Item 24, section 24D |3.38 |
|Item 24, subsection 24E(1) |3.41 |
|Item 24, subsection 24E(1) and section 24H |3.43 |
|Item 24, subsections 24E(2) and (3) |3.44 |
|Item 24, paragraph 24E(4)(a) |3.45 |
|Item 24, paragraphs 24E(4)(b), (c) and (d) |3.46 |
|Item 24, subsection 24E(5) |3.47 |
|Item 24, subsection 24E(6) |3.48 |
|Item 24, subsection 24E (7) |3.49 |
|Item 24, subsection 24F(1) |3.50 |
|Item 24, subsection 24F(2) |3.51 |
|Item 24, subsection 24G(1) |3.52 |
|Item 24, paragraphs 24G(2)(a) and (d) |3.54 |
|Item 24, paragraphs 24G(2)(b) and (c) |3.55 |
|Item 24, subsection 24G(3) |3.56 |
|Item 24, subsection 24G(4) |3.57 |
|Item 24, subsection 24J(2) |3.58 |
|Item 24, section 24K |3.60 |
|Item 24, paragraph 24K(4)(a) |3.61 |
|Item 24, subsection 24K(8) |3.62 |
|Item 24, section 24L |3.64 |
|Item 24, section 24M |3.72 |
|Item 25, subsection 25(4) |3.67 |
|Item 26, paragraph 29(1)(aa) |3.68 |
|Item 27, paragraph 18(4B)(ca) of the |3.71 |
|Financial Transaction Reports Act 1988 | |
|Items 28 to 40, section 301-125, subsections|3.73 |
|307-5(1), 307-142(1) to (3), 307-300(1) to | |
|(3), 307-350(2B), and paragraph | |
|307-120(2)(e) of the ITAA 1997 | |
|Item 41, subsection 8AAB(5) of the TAA 1953 |3.69 |
|Items 42 and 43, subsection 250-10(2) in |3.70 |
|Schedule 1 to the TAA 1953 | |
|Item 44 |3.74 |
|Item 45 |3.75 |
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