Cessation of employment removed as a taxing point for ESS interests which are subject to deferred taxation from 1 July 2022.
The Employee Share Scheme (“ESS”) rules generally operate to require that any discount to the market value of the ESS interest acquired is to be included in the employee’s assessable income in the year the interest is acquired: referred to as up-front taxation.
However, in certain situations, the year in which the discount is brought to tax may be deferred: referred to as deferred taxation.
Legislation that received Royal Assent in February 2022 removed cessation of employment as one of the possible deferred taxing points for ESS interests from 1 July 2022.
That is, for ESS interests eligible for deferred taxation for which a deferred taxing point had not occurred on or before 30 June 2022, the deferred taxing point will now only be the earliest of:
- The time when there is no real risk that the interest will be forfeited or lost (other than by disposal) and there are no longer any genuine restrictions preventing the disposal, or
- At the end of the 15-year period following the acquisition of the interest.
In practice, this will require employers to maintain records of ESS interests issued to former employees that are subject to deferred taxation so that, for the 2022-23 and later income years, they can:
- Provide those former employees with ESS Statements by 14 July following the income year in which the deferred taxing point occurs.
- Include in the annual ESS reports lodged with the ATO, details of ESS interests of former employees for whom a deferred taxing point occurred in the relevant year.
- Account to the ATO for the tax required to be withheld if no TFN was provided by the recipient of the ESS interest. While no-TFN withholding is unlikely to be required in respect of ESS interests provided to employees, the ESS rules also apply where the recipient of the ESS interest is not technically an employee – directors, other office holders and independent contractors. For completeness, providing an ABN does not avoid no-TFN withholding obligation in respect of ESS interests. Where no-TFN withholding applies, the provider of the ESS interest is entitled to recover from the individual the amount remitted to the ATO.
ESS documentation should be reviewed and updated to reflect the removal of cessation of employment as a deferred taxing point and the implications of the no-TFN withholding obligation.