Click here for a client alert from our Sydney office describing the proposed new legislation reforming the taxation of employee share schemes (the Bills) introduced into the Australian Parliament on October 21, 2009.
For
U.S. multinationals who make grants of shares or rights to acquire
shares to employees or consultants/independent contractors in
Australia, the key points to focus on, assuming that these changes are
enacted as set out in the Bills, are as follows:
1. The
Bills as introduced into Parliament are generally the same as
previously announced back in August 2009 and described in our previous
client alerts. That is, the effective date (generally
grants made on or after July 1, 2009) and the general approach to the
timing of taxation remains the same. The new employer
reporting rules and the new rules to determine the amount to include in
taxable income when a taxing point occurs, however, will apply to all
outstanding grants.
2. A key change is the possibility to defer tax at vesting of stock options if the option is underwater at that time. You
will recall that in the prior version of the legislation, taxation
would occur at vesting of underwater options so long as they were not
underwater by more than 50%. An example in the Explanatory Memorandum (EM)
to the Bills indicates that if the option by its terms may not be
exercised until it is at least at or in the money, then the taxable
event will be deferred until the share price equals or exceeds the
option exercise price on or after the vesting date.
3. The
Bills and EM indicate that in valuing options (so-called unlisted
rights) companies will be required to use the valuation tables in the
regulations until such time as the government completes its review of
market valuation issues and proposes new rules (not before February
2010). As you will recall, in some cases this will result
in valuation of options in excess of the current intrinsic value
(spread) on the option at the point of taxation.
It
may be advisable with respect to any options grants made in Australia
on or after July 1, 2009 to explicitly provide in the grant documents
that the option may not be exercised unless and until the market value
equals or exceeds the exercise price. (Although it will
be highly unlikely that an employee would try to exercise an underwater
option, most option grant terms do not explicitly preclude this). This
will avoid having the employee taxed at vesting on an option that
cannot be exercised and may never have value. It is also noted that if
an employee is subject to deferred tax in such circumstances a refund
may not be available if their options later lapse because the employee
chooses not to exercise them in cases where the options are underwater.
An
employee might be well advised in the case of an option which is
underwater at vesting to do a cashless exercise of the option within 30
days of its coming into the money. Although he or she
will have a modest or no gain, there will be no tax due (or tax on only
the modest gain realized), since the sale price of the shares can be
used to calculate the taxable income, and only a true economic gain
would be taxed.
This
is obviously not an ideal situation, but it at least avoids the phantom
income problem that existed under the prior version of the legislation. It seems likely that many companies will shift to grants of restricted stock units (RSUs)
in lieu of options in Australia, since the taxation of the options at
the point of vesting (or when they come into the money, if later)
removes one of the attractive features of options (the ability to time
the exercise and the income). RSUs are also taxed at
vesting, but the tax should be the value of the shares at that point in
time and the employee may sell sufficient shares at that point to cover
the tax liability.
Obviously,
we will keep you posted on any further developments with respect to the
Bills, which will become effective only following passage by Parliament
and Royal Assent.
