As foreshadowed in our 18 November 2014 tax bulletin, amendments in relation to employee share scheme (ESS) tax liabilities have been enacted with effect from 1 July 2015.
Excitingly in relation to Start-Ups, the ATO has just published a Legislative Instrument (and Explanatory Statement) relating to the methods for valuing unlisted ESS shares , which in the case of a many Start-Ups, ignores the value of any intangible assets (which may often be its principal source of value). The ability to issue ESS rights to employees without having to take into account the value of intangibles may greatly attract talent to Start-Ups with insufficient capital to pay high salaries.
Together with this certainty about valuation, the provisions allow a discount of up to 15% on that valuation, before the employee will have any tax liability in relation to the issue of the shares.
The definition of Start-Up is broadly:
(a) An Australian resident company that is not listed on a Stock Exchange;
(b) Incorporated for less than 10 years;
(c) Has an aggregated turnover of not more than $50M
More specifically, the exclusion of intangibles in the valuation will be available if the company has only ordinary shares and:
(a) it has not raised capital of more than $10M in the 12 months immediately prior to the valuation;
(b) at the date of valuation, the company has not been incorporated for more than 7 years; or
(c) is a small business entity within the meaning of s328-110 Income Tax Assessment Act 1997.
(there are adjustments if the company has preference shares)
It is also important to note that this valuation methodology is only used for the purposes of determining the tax payable by an employee pursuant to an ESS.
If you have any queries in relation to an ESS please contact Anthony Pointon or Robert Gordon of our office on (03) 9614 7707.
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