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New Tax Treatment of Employee Share Schemes: Our First Impression


New Tax Treatment of Employee Share Schemes: Our First Impression

By , August 25, 2021
Action – Reaction I

Earlier this week Jason Falinski MP Chair of the House of Representatives Inquiry into the tax treatment of Employee Share Schemes, handed down the final report – “Owning a Share of your work: Tax Treatment of Employee Share Schemes.

The report includes two broad roadmaps to be pursued (see below) and a set of 18 detailed recommendations. Included amongst the recommendations are several which were included in submissions made by Succession Plus. In our experience with implementing Employee Share Ownership Plans for business owners over the last 15 years (the first ESOP I set up was in 2006 and it is still running successfully), these recommendations are a massive step forward in encouraging the use of Employee Ownership. ESOP’s used in an SME are normally great economic multipliers with a disproportionate impact and a win-win-win scenario where employees, founders and the business are all better off.

Roadmap Option A recommends that Employee Share Schemes (ESS) be treated as capital for the purposes of taxation and dealt with under the capital gains tax regime. If this option is taken up then most of the challenges that Australian businesses face in implementing ESS fall away. The other significant recommendation of this option is the removal of most of the regulatory regime that was initially designed for retail consumers not employees working at the company. The reasons for this are that the regulatory regime is not useful, most start-ups cannot meaningfully value themselves and doing so costs valuable money that could otherwise be used on business development. And in any case the employee is unlikely to be contributing financially to the scheme.

Roadmap Option B borrows from many of the recommendations made by the Nuttall review in the United Kingdom (UK). It reduces conflicts between the Tax System and the Corporations Law. It further seeks to encourage the use of ESS by reducing the cost and complexity of implementing a scheme.

Over the next two weeks we will review each of the 18 recommendations (mostly good, some great), analyse the likely outcomes of each and follow the likely implementation plan.

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