Business stymied on employee share plans must consider alternatives

Businesses including start-ups need not waste their time waiting for tax changes to employee share plans given there are alternatives which can be implemented now, according to a leading corporate law firm.

There is concern that the current tax regime, which requires employees to pay tax on their share options as income before they are sold, makes it difficult for Australian companies to compete in the global market. There was no change in the latest federal budget and business lobby groups continue to push for change.

But Anthony Bradica, Partner at leading independent business law firm Hall & Wilcox, said that business can still achieve the same outcome via different means. “Loan funded plans are widely available to Australian companies and avoid the tax problem with employee share options.”

In a loan funded plan, the company gives an employee a loan to acquire shares in the business at market value, with tax only paid once the shares are sold. “Employees are still being rewarded for capital growth in the shares, and the company is no worse off financially.

“Importantly, this avoids the issue around options vesting, which is where the tax kicks in under the current employee options scheme and is the main issue, as employees don’t necessarily want to sell once the options vest.

“With loan funded plans tax is only paid once the shares are sold, which means employees can theoretically hold the shares for many years. And, only half the gain is taxed under the capital gains tax rules.

“Economically, loan funded plans mimic the way employee share options work, but without the adverse tax hit.”

Mr Bradica said that companies keen to provide employees shares now can do so effectively, and would have the flexibility to adapt to any eventual change in the rules. “Businesses are not locked into loan funded plans and may consider them a useful stop-gap.”

Government introduced the current rules in 2009 following concern that executives were trying to reduce tax by retrospectively making choices about when tax was payable.

Under the current regime options are taxed once they vest, treated as income and taxed at the employee’s marginal rate. The advantages of share options are diminished because employees are having to sell part of their option holdings to pay the tax bill.

Lobby groups hoping to wind back these rules argue that it reduces Australia’s ability to compete globally, particularly for start-ups, which commonly entice employees with options – usually with a ‘vesting’ period of several years which acts as an incentive for employees to stay.

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Emma Woolley

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