On February 10, 2022, the Australian Parliament passed legislation which eliminates termination of employment as a taxable event for Employee Share Scheme (ESS) awards that qualify for tax deferral (i.e., stock options, restricted stock, restricted stock units (RSUs), or an employee stock purchase plan offered to employees).
ESS awards that qualify for tax deferral are subject to taxation when an “ESS Deferred Taxing Point” occurs. Currently, an employee’s termination of employment is one of the possible ESS Deferred Taxing Points if the employee does not forfeit their equity awards at the time of the termination. If an ESS Deferred Taxing Point occurs at termination of employment, this can pose tax issues for the employee because tax may become due on the award before the award itself generates economic income for the employee. Furthermore, the issuing company must report the taxable amount at termination on the company’s annual ESS statements to the employee and the Australian Tax Office.
From July 1, 2022 termination of employment will no longer be an ESS Deferred Taxing Point. Accordingly, an ESS award that qualifies for tax deferral generally would become subject to tax at the earliest of the following points (even if the employee had already terminated employment without forfeiting their award):
- for share awards (i.e., restricted shares) – when there is no risk of forfeiture and no restrictions on disposal of the shares;
- for rights to acquire shares (i.e., RSUs or options) – when the employee exercises the option or the RSU vests and there is no risk of forfeiting the resulting shares nor any restriction on disposal of the shares; and
- 15 years from the grant date.
Please note that this new legislation does not impact the requirement that if the shares are sold within 30 days after the relevant times in the first two bullet points, the taxable event will be moved to the date of sale. There is also no change to the current annual ESS tax reporting requirements (although of course, termination of employment will no longer be a reportable event).
The new legislation will become effective for taxable events occurring on or after July 1, 2022 (i.e., the beginning of the new Australian tax year), even if the awards had been granted prior to July 1, 2022. Until then, companies still need to treat termination of employment as a taxable event if awards are not forfeited upon termination.
To learn more, click here to read our guest blog on the NASPP blog.
