The Federal Government announced on 14 October 2014 that it is changing the rules on employee options and that new tax concessions will apply for employee options and shares in startup companies from 1 July 2015.
Additional tax concessions for startups is a great start and finally reflects the Government working to the assist with the rapid expansion of the new engine room of the Australian economy.
To assist with what a startup is, Treasury have defined a startup as:
- Having an aggregate turnover of not more than $50m
- Are unlisted
- Have not been incorporated for more than 10 years
Granting options to employees
Some of the key tax concessions proposed in relation to employee options for startups are as follows:
- Options will potentially qualify for the tax concession if the exercise price is not less than the market value of the shares at the date of grant.
- Such options under this scheme will not be taxed on grant, vesting or exercise. Instead, the taxing point will generally be deferred until the eventual sale of the shares (a possible 15-year limit may apply on this if the startup is still around).
- The gain made on the sale of the shares will generally be taxed as a capital gain (and therefore the CGT 50% discount is likely to apply if the exercised shares are held for more than 12 months). However, if the shares are sold within 3 years of grant of the options, it is possible the gain may be taxed as employment income.
Some of the key tax concessions proposed in relation to employee shares for startups are as follows:
- Shares will potentially qualify for tax concessions if the shares are acquired at a discount of no more than 15% to the market value of the shares at the date of purchase.
- The discount on the acquisition of the shares may be tax exempt. Consistent with the current $1,000 tax exemption, this new concession will be a “real” exemption as, for CGT purposes, this discount will be included in the cost base of the shares (so is never taxed).
- The taxing point on such shares will generally be deferred until sale.
- The gain made on the sale of the shares will generally be taxed as a capital gain (and therefore the CGT 50% discount on will generally apply). However, if the shares are sold within 3 years of purchase, it is possible that some or all of the gain on sale of the shares (including the discount on grant) may be taxed as employment income.
We will bring more information on employee options for startups as the Government provides additional guidance on this topic.