Client Update: Employee share scheme tax reporting
24 September 2010
In brief: The Australian Taxation Office's Employee Share Scheme working party had its winding up meeting this week. Partner Sarah Bernhardt (view CV) (who was a member of the working party) and Lawyer Teresa Campbell report on the main discussion points.
- Status of FY10 reporting
- FY11 ESS reporting – what can we expect?
- ESS issues still being considered by the ATO
New tax rules applying to employee share schemes (ESS) became operative from 1 July 2009. These rules include a new obligation on employers to provide an annual ESS statement to their employees soon after the end of each tax year. ESS statements contain an estimate of the amount of ESS income the employee may be required to include in their income tax return for the preceding tax year. The first ESS statements for the tax year ended 30 June 2010 (FY10) were due to be provided to employees in July 2010, with similar information due to be provided to the Australian Taxation Office (the ATO) by August 2010.
The ATO convened the ESS working party in early 2010 to assist it in implementing the new FY10 ESS reporting. As the first reporting date has now passed, the ESS working party held its winding up meeting in September 2010. At that meeting, the ATO discussed the status of FY10 ESS reporting, shed some light on what we might expect for FY11 ESS reporting and outlined a number of ESS issues it is currently working on.
ATO income matching
The ATO confirmed it is likely to be about six months before it begins to follow up on mismatches between the employer-reported amount and the amount an employee has included in their FY10 income tax return. The ATO noted that in conducting any ESS income matching activity, it will be mindful of the factors that can create potential mismatches between the reported amount and the assessable amount (such as where an employee sells shares within 30 days, where the employee elected to pay tax on grant of the award or where an employee has worked offshore during some or all of the vesting period). We therefore expect that the first follow-up letter from the ATO to an employee in relation to ESS mismatch issues will give them the opportunity to explain the reason for the mismatch, without assuming the employee has made an error in their income tax return.
Amended ESS statements and ESS annual reports – forfeited awards
It would seem that where an award is forfeited after an employer has satisfied its reporting obligation for the award, and the forfeiture of the award entitles the employee to exclude the reported amount from their income tax return/assessment for the reporting year (please see below), the employer may be required to prepare an amended ESS statement and an amended ESS annual report. For example, where an employee is subject to tax on cessation of employment in FY10 (which was reported on the ESS statement in July 2010 and to the ATO by August 2010) and the employee later forfeits the award after the reporting dates, the employer may be required to provide both the employee and the ATO with amended reports within 30 days of becoming aware of the forfeiture. The ATO is expected to release some guidance (most likely by way of an example) on this issue.
We stress the importance of employers remembering that amended reporting will only be required where the employee is otherwise able to access the 'refund' rules on forfeiture of the award. Unfortunately, there are different refund rules applying to awards granted before 1 July 2009 than to awards granted on or after that date. Employers must therefore be careful to ensure they only provide amended reporting where the refund rules apply on forfeiture, having regard to when the award was granted.
It was confirmed that the ATO would place greater emphasis on electronic reporting for the FY11 ESS reporting period. To assist employers with their ESS electronic reporting obligations, the ATO proposes to provide broader access to an improved Excel-based product.
Format of employee's ESS statement
The ATO confirmed that it did not expect there would be changes to the FY10 format of the employee ESS statement, and that it will continue to require employers to report gross amounts on the statements, with no reduction for foreign employment. The ATO's intention is to not increase the administrative burden on employers when they are fulfilling their reporting obligations.
Continued reduced reporting for pre-1 July 2009 tax exempt plans
The ATO confirmed that reduced reporting will continue in FY11 for awards acquired before 1 July 2009 where the $1000 tax exemption is potentially applicable.
Reduced reporting for post-1 July 2009 $1000 tax exempt plans?
In FY10, the ATO allowed reduced reporting for awards acquired on or after 1 July 2009 through a $1000 tax exempt plan, where the sum of the employee's employment benefits from that employer was no more than $150,000. The ATO advised that it was unlikely to offer this reduced reporting in FY11 but that it will further consider the issue.
Who is the ESS 'provider'?
Members of the ESS working party discussed the meaning of ESS 'provider' for the purpose of the ESS reporting obligations, in the context of foreign grantors of awards where the employer was an Australian subsidiary. Some members noted that the FY10 reporting documentation (ie the ATO reporting form and the supplier lodgment declaration) created some confusion in this context, as those forms appear to envisage the provider was the employer company. The ATO indicated that it will review these documents for FY11, to see if there can be clarification of which entity has the obligation to lodge the documents where there was a foreign company grantor but an Australian employer, as well as of the process to be followed if a foreign company provider wanted to authorise a related Australian employer to prepare and lodge the documents.
Interpretative product on 'transitional' indeterminate rights
The ATO advised that it is currently working on an interpretative product for transitional 'indeterminate rights'. A transitional 'indeterminate right' is a right that was granted before 1 July 2009, which, as at 30 June 2009, was not a right to acquire shares, but became such a right on or after 1 July 2009. For example, an award would be a transitional indeterminate right if it was granted before 1 July 2009 where the employer had a right to deliver either cash or shares on exercise of the award, and, on exercise of the award after 1 July 2009, the employer elects to deliver shares rather than cash to the employee. An award (or part of an award) would also be a transitional indeterminate right if it was granted before 1 July 2009 and the maximum number of shares to be acquired from that right were not able to be calculated until on or after 1 July 2009 (eg share appreciation rights and dividend equivalent shares).
It is expected that the ATO interpretative product will cover whether, when the transitional indeterminate right rule deems awards to have been acquired before 1 July 2009, an employee would be entitled to make a late election to pay tax on grant of the award, and/or whether any existing elections to pay tax on grant will retrospectively apply. It is also expected to cover whether the ATO will impose interest (and if so, at what rate) for late inclusion of an amount in an earlier tax return as a result of the transitional indeterminate right rule applying.
Privacy laws and TFNs
The ATO noted that it is still working with the Privacy Commissioner as to the circumstances in which providers may pass on an employee's tax file number (TFN) to share plan administrators. We note that the ATO's current position (as outlined in the online ATO ESS Guide for employers) is that where a provider has engaged the services of a third party to administer the ESS reporting, the provider may provide the third party with the employee's TFN.
CGT and ESS trusts
The ATO confirmed that there is a potential technical issue with the capital gains tax exemption for ESS trusts contained in the revised s130-90 of the Income Tax Assessment Act 1997 (Cth), which it has referred to Treasury for possible legislative amendment. As currently drafted, there is an exemption from capital gains tax for the trustee of an ESS trust where it transfers ESS shares to an employee where the employee is acquiring those shares on exercise of a right to acquire shares. However, such an exemption may not be available where the employee is acquiring those shares without first having been granted a right to acquire the shares. This outcome appears illogical and, we assume, will be clarified and/or legislatively fixed.
Now that FY10 ESS reporting is (or should be) substantially completed, the focus for employers should turn to:
- ensuring employers are able to comply with amended reporting requirements when awards are forfeited. To do this, employers need to be aware of the different refund rules that apply to awards granted before and after 1 July 2009;
- getting ready to deal with inevitable queries from employees when they receive a 'please explain' letter from the ATO on mismatches between the amount reported to the ATO by the employer and the ESS income amount included in the employee's FY10 income tax return;
- implementing (or improving) systems to allow timely electronic ESS reporting to the ATO for FY11;
- where the provider of the awards is different from the employer, ensuring that all necessary authorisations are properly documented; and
- considering the impact of the soon-to-be-released indeterminate rights product on awards and providing revised communications to affected employees.
- Sarah BernhardtPartner,
Ph: +61 3 9613 8937
- Katrina ParkynPartner,
Ph: +61 7 3334 3323
- Adrian ChekPartner,
Ph: +61 2 9230 4800
- Suzanne HolsteinSenior Associate,
Ph: +61 3 9613 8159