Outline – Up-front taxation

Generally, any discount on the market value of shares or rights provided under an ESS is taxed up-front (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.

A $1,000 tax exemption is available to employees participating in an ESS who pay tax up-front, if they have a taxable income (after adjustments) of $180,000 or less, and the employee and the scheme meet certain other conditions.

Those other conditions for the up-front concessions are:

• The employee must be employed by the company offering the scheme, or a subsidiary ;
• The scheme must be offered to at least 75% of permanent employees with three or more years of service;
• The shares or rights provided must not be at real risk or forfeiture;
• The ESS interests offered under the scheme must relate to ordinary shares;
• The shares or rights must be held by the employee for three years, unless the employee ceases employment; and
• The employee must not receive more than 5% ownership of the company, or control more than 5% of the voting rights in the company.

Deferred taxation

There are two exceptions to the general up-front taxation of an employee under an ESS. These are where the shares/rights are acquired:

• at a discount in relation to ordinary shares and there is a real risk or forfeiture; or,
• Under certain salary sacrifice arrangements in which the employee receives no more than $5,000 worth of shares in an income year.

The deferred taxing point for shares is the earliest of when:

• The risk of forfeiture is removed and there are no genuine restrictions preventing disposal; or
• When the employee ceases employment; or
• Seven years expires after acquisition.