Proposed Employee Share Schemes (ESS) Changes

The Federal Government has released proposed changes to the taxation of Employee Share Schemes (ESS) to take effect for interests acquired from 1 July 2015.  This includes incremental changes for all ESS arrangements and a new regime designed for unlisted start-up companies only.

Current Regime

An employee share scheme (ESS) is a scheme under which shares, stapled securities, or rights to acquire them (ESS interests) in a company are provided to an employee or their associate in relation to the employee’s employment.

These ESS interests are often provided at a discount or as a bonus for work performed by the employee.  In brief, employees who receive such interests are required to include the discount to market value as assessable income in their personal tax return.  The timing of the inclusion of this income has always been a controversial topic as share prices fluctuate and at times significant tax is payable without having a liquid asset to meet the tax arising from its inclusion in the return.

Under the current regime unless a “real risk of forfeiture” can be demonstrated, the taxpayer must include the discounted shares as assessable income when they are granted to the taxpayer.

Key Reforms                       

Some of the key reforms include:

• Rights to acquire shares (including share options) will become taxable at exercise
• The opportunity to defer taxation on ESS rights, that are not subject to real risk of forfeiture, but only a restriction on disposal
• The maximum period for deferral of tax will increase from 7 to 15 years
• Employees with ownership and voting rights up to 10% (increasing from 5%) will be eligible for deferral of taxation on ESS grants

General Changes – all ESS Arrangements
Implications of the proposed changes to the general ESS regime are likely to include:

• When issued at a discount, rights (including options) will always be tax deferred.  Tax deferral for up to 15 years (from seven at present) will be permitted.  The most common taxing point will be when the rights are exercised, instead of when there is no longer any real risk of forfeiture as with the present regime.  The current ESS regime is unpopular because it can be difficult to determine exactly what constitutes “real risk of forfeiture” and the resulting taxing point is rarely aligned with the time when the taxpayer crystallises cash from the arrangement.
• The changes with respect to rights are likely to have different impacts depending on the size of the employer.  Larger companies with relatively stable share prices are likely to use the extended tax deferral to offer taxpayers longer term options.  Tax is deferred, but the gain is taxed on revenue account.
• Smaller listed companies often have higher growth potential, at least in percentage terms.  We see the existing practise continuing where options are issued with a steeper exercise price, thus implying a much lower option value at issue (and almost nil if the exercise price is steep enough).  By issuing at full value (i.e. avoiding a discount) the option is now on capital account and thus eligible for the 50% CGT discount if held for at least 12 months.
• Just because a tax “concession” exists, doesn’t mean you should take it.  Rather the ESS automatic deferral on rights should be seen as a fork in the road.  Path A offers tax deferral, with the eventual gain being on revenue account. Path B requires the option to be acquired for full value up front, but is then on capital account and eligible for the 50% CGT discount.  Both paths are valid, with the choice likely to be dependent upon the profile of both the employee and the employer company.
• Present ESS tax concessions can only apply when an employee owns less than 5% in the company which causes issues, particularly for smaller organisations.  That threshold will be increased to 10%.

Please call our office to discuss any issues arising from ESS or how the proposed changes may influence your decision to enter ESS arrangements.

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Is a binding nomination necessary for a Self Managed Superannuation Fund

Death is not something we think about, but inevitably it will happen to every one of us! Your Superannuation is likely to be one of your most valuable assets and you may not realise that your superannuation does not ordinarily form part of your estate and is therefore not covered by your Will.

We understand that estate planning can be daunting and so we work closely with trusted Law Firms to ensure your estate planning is tax effective as well as ensuring the outcome you want.

You have the option to provide the Trustee of your fund with a death benefit nomination. This is a notice requesting the payment of your superannuation entitlement be paid either to your estate or one of your specified dependants.

There are two types of nominations:

• A binding nomination which is binding on the trustee – that is the trustee must comply with it;
• A non-binding nomination – the trustee can exercise their discretion not to follow your nomination.

Please be aware that if there is no remaining trustee, your legal personal representative (the executor or administrator of the estate) acts as a trustee.

A valid binding nomination gives you certainty that your superannuation benefit will be paid to your nominated beneficiaries. If you have structured your Will to achieve certain outcomes, by having a binding nomination in place to your estate, your executor will pay out your superannuation benefits according to the terms of your Will. Alternatively a binding death benefit nomination can be used to direct your superannuation benefits to a beneficiary directly.

Unfortunately superannuation members die with no valid ‘nomination’ in place. If no binding nomination is made, the trustee or Legal personal representative (if there is no remaining Trustee), will use their discretion to distribute your superannuation entitlement. If the binding nomination form is invalid because you nominated an invalid beneficiary (e.g. your loving pet), then your death benefit will be paid using the remaining trustees’ discretionary powers.

For a nomination to be binding, you must nominate that your superannuation death benefit is to be paid to either your dependants or to your estate. Eligible persons are as follows:

• Legal Spouse
• De facto spouse including same sex partner
• Any child including any adopted child, step-child or ex-nuptial child
• Any person who was a dependant of the deceased just before the death
• Any person you have an interdependency relationship with
• Legal personal representative of your estate

Please be aware that an otherwise binding nomination is generally no longer binding when the nominated person is the deceased members spouse and there has been a divorce or permanent separation.

If you have a binding nomination in place, you should make sure you update your nomination to reflect any change in circumstances like marriage or the birth of a child.

You can provide a non-binding nomination which enables you to advise the trustees of your SMSF on how you wish your superannuation savings to be distributed upon your death.  However because it is non-binding, the final decision is still at the trustee’s discretion.

Your SMSF’s trust deed will detail what information a binding nomination requires in order to be valid. Some deeds require two witnesses (aged 18 years or over who are not nominated as a beneficiary) to sign the nomination document and it can also stipulate that the binding nomination has to be renewed every three years or it will lapse. SMSFs are able to offer non-lapsing or lapsing binding nominations, depending on the terms of the SMSF’s trust deed.

If you are unsure if you currently have a binding nomination in place or wish to discuss any of the information above, please contact Helen Cooper, the Senior Manager of our Self Managed Superannuation team.

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