It is that time of the year when thoughts turn to Annual Reports and Annual General Meetings (and football finals for some).
Similarly, it is the time where consideration is given to the possibility of rewarding, or providing incentives to, individuals by way of shares, performance rights or options.
I have written several articles and presented sessions on share-based payments / employee share schemes (ESS) and thought it opportune to highlight just a few of many areas that still appear to cause concern:
Initial taxing point
Other than the 10% noted below, there are other provisions that must be satisfied to defer the taxing point. Like scrip-for-scrip rollovers, there is this perception that deferral will always be allowed. Not always. You must review all the provisions to determine whether there is a deferral of a taxing point (noting that deferring the initial taxing point may not always be the best outcome).
10% test
The 10% ownership and voting rights test is critical. Effectively, if you hold more than 10% ownership, or control more than 10% of the voting rights, of the company you cannot access any of the deferral mechanisms (i.e. you will be taxed up front) or access the Start-up concession. The 10% is associate inclusive and fully diluted (but the kicker is the company denominator is not fully diluted).
ZEPOS v Performance Rights
For Performance Rights that are not taxed upfront, it may be problematical when Performance Rights vest and unfettered shares are issued causing the deferred taxing point (assuming the deferred taxing point has not already occurred). Using a zero exercise price option may delay the deferred taxing point further until exercise. Remember (other than for Start-up concession) the 12-month time frame for the 50% CGT discount (if available) commences from when the share is acquired, not from the grant of the ZEPO or Performance Right.
Payroll tax
The vexed issue of when to bring ESS interests to account for payroll tax purposes. The default position is upon vesting (noting not upon the exercise of the option – therefore maybe a different value for Div 83A ITAA97). The valuation can be brought forward to the grant date when the amount is included in the payroll tax return relevant to grant date.
Reporting
There are still some entities that may not be providing the ESS statement to the Employee by the first 14 July post-year end. The reporting is required for taxed upfront ESS, provision of ESS under the Start- up concession and if the deferred taxing for an ESS has or could have happened during the previous year. Also, you must take into account the 30-day rule if the company is aware the employee disposed of the ESS interest within 30 days of the taxing point.
This article first appeared in the Spring 2021 issue of Client Alert.