Australian federal budget 2008: employee share plans and FBT changes
Two measures announced in the Federal Budget on Tuesday 13 May 2008 affect the tax treatment of shares or rights acquired under employee share schemes. In addition, changes were also announced to Fringe Benefits Tax (FBT) treatments of certain perquisites.
Unfortunately, as with all budgets, changes are announced with no accompanying new legal or regulatory drafts.
This article summarises what we know so far.
Election to be taxed in year of grant
For shares and rights acquired from 1 July 2008, the Government is going to ensure that income from employee share schemes is included in assessable income if a taxpayer elects to be assessed upfront. Where the amount is not included in the employee's tax return, then the employee will be taxed under the tax-deferral option.
The Commissioner will retain the power to allow a taxpayer an extension of time to make the election. This is an administrative change designed to ensure that taxpayers do not abuse the system. It will make no difference to employees who have complied with their tax obligations.
It does not change the tax treatment for income received under employee share schemes that comply with the requirements of Division 13A of the Income Tax Assessment Act 1936. Under Division 13A, tax on “qualifying” shares and rights (including options) can be “deferred” for up to 10 years or, at the election of the employee, can be assessed in their income tax return for the tax year in which the grant was made. Under the current election requirements (set out in section 139E of the ITAA), taxpayers should complete a written election, in a form approved by the Tax Commissioner, before they lodge their return for the tax year in which the shares or rights were acquired (or within such further time as the Commissioner allows). This election applies to all shares and rights acquired by the taxpayer under employee share schemes in the same tax year.
We have always understood that the taxpayer has been required to include the value of their shares or rights (including options) in that tax return. Apparently, however, many taxpayers were not declaring the value of their shares or rights but, after they knew they could save tax, were subsequently seeking to amend their tax return and claiming that they had elected to be taxed in the year of grant. And the Tax Office was allowing this!
The Government estimates this measure will save $77 million from financial years 2008-09 to 2011-12.
There has been some speculation in the media that this measure would allow employees who receive multiple share and rights grants in a given tax year to claim the election for those grants for which they included details in their tax return for the year of grant and to defer tax on the other grants. We would be very surprised if this was the outcome, but have been seeking to clarify the situation with Treasury. We will let our readers know as soon as we get an answer.
Removal of double taxation on capital gains where shares held under a trust
The Government will remove double taxation that arises in relation to certain employee share schemes (ESS) that use employee share trusts.
The changes will apply in relation to capital gains tax (CGT) events occurring from 7.30 pm (AEST) on 13 May 2008.
This measure has no estimated revenue impact.
Currently there is no CGT relief for the trustee (or beneficiary) of an employee share trust on the transfer of shares to an employee because shares acquired by an employee as a result of exercising ESS rights are not ‘ESS shares’. Double taxation arises because the capital gains made by the trustee while the shares are held in the trust are also assessable to the employee either under ESS provisions or later as a capital gain. This measure will ensure that CGT relief is provided.¬¬
Fringe Benefits Tax Exemption on work-related items
The Government will tighten the current fringe benefit tax (FBT) exemption for certain work‑related items (including laptop computers, personal digital assistants and tools of trade) by ensuring the exemption only applies where these items are used primarily for work purposes. The FBT exemption will generally be limited to one item of each type per employee per year.
This measure will apply to items purchased after 7.30 pm (AEST) on 13 May 2008.
The measure reduces the FBT concession and tax expenditure for work‑related items. This measure will have an ongoing gain to revenue which is estimated to be $650 million over the forward estimates period. This measure is also expected to increase GST payments to the States by $120 million over this period.
The measure will ensure consistency with the rules applying to mobile phones, computer software, and protective clothing. The current list of FBT exempt work‑related items will also be updated to reflect changes in technology.
The Government will also deny employees depreciation deductions for FBT exempt items (that is, items purchased primarily for work purposes) purchased from 7.30 pm (AEST) on 13 May 2008.
For items purchased before that time, employees will be denied depreciation deductions for the 2008‑09 and later income years. This measure will ensure that employees are no longer able to gain a double benefit by obtaining an FBT exempt item (such as a laptop computer) from their pre‑tax income, and then claim a deduction for depreciation.
The Government will amend the FBT law to ensure that the full value of a benefit that has been provided to both an employee and an associate in relation to a jointly held asset will be subject to FBT.
This tax integrity measure will have effect for new arrangements from 7.30 pm (AEST) on 13 May 2008 and is estimated to provide an ongoing gain to revenue of $49 million over the forward estimates period to 2011-12.
The measure will re‑establish the principle that income and deductions arising from jointly held assets should be allocated between joint owners according to their legal interests.
To provide time for employers and employees to renegotiate salary packages to avoid incurring a FBT liability, employees who have already entered into salary sacrifice agreements with their employer in relation to jointly held assets will be able to continue existing arrangements until the end of the current FBT year on 31 March 2009.