As we reported in our July 2, 2015 client alert, the new Australian share plan legislation received Royal Assent on June 30, 2015 and applies to all equity awards granted on or after July 1, 2015.  Under the new tax regime, stock options are generally taxed at exercise only (not at vesting).

In this post, I want to explore the practical implications of the new legislation for most companies and examine the exceptions to the rule.

Grant Document Changes

Under the old tax regime that was in effect from July 1, 2009 until June 30, 2015, options generally were taxed at vesting which obviously was not a good result for companies nor for employees.  As a result, many companies stopped granting options in Australia altogether.  The companies that persevered (often private companies with no alternatives, such as RSUs, available to them) usually imposed special terms designed to avoid a taxable event prior to a liquidity event or at a time when options were underwater.  To achieve this, they restricted exercisability of the options until a liquidity event occurred and/or until the option was in the money.

For options granted prior to July 1, 2015, these restrictions should continue to be enforced because the old tax regime continues to apply to these grants.  However, for options granted on or after July 1, 2015, these restrictions are no longer needed.  This means companies should revise their award documents and delete these restrictions (usually contained in the Australia appendix to the award agreement).