Cessation of employment has been removed as a deferred taxing point for Employee Share Schemes from 1 July 2022.
Employee Share Schemes (ESS) are often used by employers to attract, retain and motivate staff by issuing interests such as shares, rights (including options) or other financial products to their employees, usually at a discount to their market value.
ESS interests are commonly structured to allow an employee to defer paying income tax in relation to their ESS interests until the income year in which the ‘deferred taxing point occurs’, instead of paying tax in the year the ESS interests are acquired. This means that an employee may defer having any liability to pay tax until such time that they have realised some value from the ESS interests and can sell or dispose of some or all to cover their tax liability.
Previously, under a tax-deferred ESS, cessation of employment was a deferred taxing point which created potential cash flow issues for some individuals, termed ‘good leavers’. Consider for example, an employee who was terminated by redundancy at the start of the covid-19 pandemic. Given the cessation of employment, this triggered a taxing point on their ESS interests at a time when they had yet to realise any value from those interests. The removal of cessation of employment as a taxing point has been welcomed by many who have been seeking the change for some years.
The removal of cessation of employment as a deferred taxing point will now apply to all new and existing ESS interests that have not reached an ESS taxing point before 1 July 2022. Tax will be deferred until the earliest of the remaining taxing points, which are:
- when there is no risk of forfeiting the ESS interests and any restrictions on their sale are lifted,
- in the case of rights, when the employee has exercised them and there is no risk of forfeiting the resulting share and no restriction on disposing of that share,
- 15 years after the ESS interests were acquired.
As always, if you have any questions, please contact us on (02) 9908 9888 or by email.