International- Australian Tax Return Forms Finally Issued - 22 June 2010

As
reported in our initial alerts on June 18, 2010 and June 22, 2010, the Australian Tax Office ("ATO")
has finally released guidance on the new employer reporting obligations,
just in time for companies to meet the reporting deadlines. 

Reportable Events for
2009/2010 Tax Year

Separate rules apply for
awards granted prior to and from July 1, 2009:

·         Grants prior to July 1,
2009 -
Reporting is required if a taxable event occurred, as determined under
the pre-July 2009 tax rules, in the Australian tax year ending on June
30, 2010 ("2009/2010 tax year").  The taxable amount must
be reported as a "discount on an ESS interest acquired prior
to July 1, 2009."  (Any terms noted in quotations refer
to the technical terms used on the Annual Report and Employee Statement
which are attached to our client alert dated June 22, 2010.)

·         Grants on or after July 1,
2009 - If
the awards are classified as "taxed up-front ESS interests,"
reporting is required for any grants that occurred in the
2009/2010 tax year (and it must be specified if the award is eligible
for an A$1,000 tax reduction); if however the awards are classified as "deferral
schemes," reporting is required only if the taxable event
occurred in the 2009/2010 tax year.

Application to U.S. Equity
Awards

It is difficult to determine
how U.S. equity awards should be classified under the Australian rules. 
The following summarizes the information we have on how stock
options, restricted stock units/awards ("RSUs/RSAs") and employee stock
purchase plan ("ESPP") rights offered by our U.S. issuer clients are
likely to need to be reported:

·         Grants prior to July 1,
2009 -
Reporting is required for options and RSUs/RSAs where a taxable event
occurred during the 2009/2010 tax year.  In most cases, the
taxable event will be the exercise of options or vesting of RSUs/RSAs.  The
taxable amount must be reported as a "discount on an ESS
interest."  Subject to our comments below on the
determination of market value, the taxable amount generally will be the
spread for options and the market value of the shares for RSUs/RSAs. 
  

Reporting generally is not
required for ESPP rights where the purchase period started prior to
July 1, 2009 but shares were purchased on or after July 1, 2009.   

Grants on or after July 1,
2009 –
Options and RSUs/RSAs that are subject to forfeiture until vesting, will
be classified as "deferral schemes" and reporting generally is
required upon vesting.  For RSUs/RSAs, the taxable amount
will be the market value of the shares at vesting.  Options
are considered unlisted rights, for which the value is more challenging
to determine (as further described below).

Note that, if awards are
non-forfeitable at grant (e.g., in the case of grantee who is
retirement eligible at grant), this may result in taxation at grant, in
which case the awards would have to be reported as a "taxed-up front
scheme."  In addition, if the employer knows that the
employee sold the shares within 30 days of a taxable event (generally
vesting), the taxable/reportable event is moved to the date of sale (the
"30 Day Rule"), but still has to be reported as "deferral scheme."

It should also be noted that
special reporting rules apply where the number of shares that an
employee may receive pursuant to an award cannot be determined at grant,
which would include stock appreciation rights and certain
performance-based vesting awards. 

For ESPP purchase periods
which started on or after July 1, 2009, reporting generally is required
at purchase.  ESPP rights should be classified as "taxed
up-front interests" and the discount (i.e., market value of
the shares less the purchase price) an employee realized on any purchase
date occurring in the 2009/2010 tax year must be reported as a "taxed
up-front scheme".  Typical Code Section 423 ESPPs will
be "not eligible for reduction" since requirements
include a three-year holding period post-purchase.

Taxable Amount – Market Value
Determination

The amount to be reported for
awards other than options is based on the market value of the
shares at the taxable event, less the amount the employee pays (if any)
for such shares.  The ATO has indicated that it will accept
any reasonable method for determining the market value of listed shares
(which includes shares listed on the NYSE or NASDAQ), including the
closing price of the shares on the applicable tax date if the stock is
liquid and does not exhibit significant price volatility.  Note
that, where the 30 Day Rule applies, the ATO guidance confirms that it
is acceptable to take the sale proceeds as the market value.

The market value of "unlisted
rights" (such as options) is either (i) the market value according to
ordinary principles (may be possible to use Black Scholes), or
(ii) the greater of the spread at vesting and the value of the
option determined pursuant to a statutory formula (which may produce a
value even if an option is underwater at vesting).

Deadlines

As any required report for
the 2009/2010 tax year must be provided to employees by July 14, 2010
and to the ATO by August 14, 2010, now is the time to act if your
company has granted equity awards in Australia.  Because
the rules are complicated and depend on the specific terms of each
award, we strongly recommend that you contact your GES attorney for
assistance in completing the forms.

Our
thanks to Erica Kidston in our Sydney office for providing assistance
with this alert.