Australian Taxation – Help Employees to save Tax With an Employee Share Scheme

Some people are not aware that if they receive shares in a company for work they are doing (either as an employee or otherwise) that the receipt of these shares can be income on which tax is payable Payroll Tax Preparation. I have noticed that this incorrect notion is more prevalent in the small business community. This is probably because the issuing of shares is a “paper” transaction that may not require any money to change hands. The value of the shares does not immediately show up in anyone’s bank account.

For many years the Australian taxation legislation has had specific provisions that deal with the taxation of shares, or rights to shares, whether those shares or rights have been received in an employment context or in the context of the provision of services. Normally benefits are taxed under the Australian fringe benefits tax law. Employee share schemes are an exception to that general rule.

Broadly, what the law tries to do is tax the “discount” on the issue of the shares or the rights. This means the difference (if any) between the market value of the shares or rights and what the recipient has to pay for those shares or rights. For example, a person receives 1, 000 shares in his or her employer’s company and they have a market value of $5, 000. The person pays $2, 000 for these. The difference between these two amounts ($3, 000) is assessable income, except if certain concessions apply. It should be noted that in this situation the person has not received any cash that could assist with funding the person’s tax bill on the income.

The rules in the Australian tax law that relate to the taxation of employee share schemes have been changed with effect from 1 July 2009. They have been completely re-written and there are some important changes to the way the law operates when compared to the former law. The new law is found in Division 83A of the Income tax Assessment Act 1997. The law only applies to “ESS interests” issued by companies.

It is still the case, as a general statement, that the discount (referred to above) is subject to tax. However, the timing of when the discount will be taxed and the amount of the discount that can be taxed is determined by the type of employee share scheme. Depending on whether a number of conditions have been met, up to $1, 000 of the discount can be exempt from tax in the hands of the employee. Also, the employer can get a tax deduction up to this amount in relation to each employee.

It is also possible for the taxing point to be deferred. Again, a number of conditions need to be met for this to be applicable. The employee share scheme rules discussed above do not apply if an “ESS interest” qualifies for deferred taxation. Further, the employer does not receive a tax deduction.

The policy behind the new provisions is that low and middle income earners should benefit from some tax concession if they are offered shares in their employer at a discount. If an employee’s adjusted taxable income exceeds $180, 000, the tax exemption of up to $1, 000 is not applicable. The new law says that one of its objectives is to increase the extent to which the interests of employees are aligned with those of their employers, by providing a tax concession to encourage lower and middle income earners to acquire shares under employee share schemes.

One of the problems for the Australian Taxation Office under the former law was knowing whether a person had received any benefits from an employee share scheme. Under the new law, employers will be required to report to the Commissioner of Taxation certain information to enable the Commissioner to ensure that the employee share scheme rules are being complied with. Countries designed their tax collection systems according to their specific needs and traditions, including prepayment or withholding of income and other taxes prior to lodgment of the income tax return and reconciliation of the actual tax payable.

The Albanian tax system today does not meet the equity, transparency and predictability criteria of a well functioning tax system. It contains significant opportunities for corruption, which further damages the accountability and credibility of the system. Of course, that these problems are at the attention of the Albanian government and the current work of the IMF (with extensive assistance from German and Sweden consultants) in collaboration with the General Taxation Directorate (GDT) is largely directed to establishing and implementing a better managerial and reporting system within the GDT to tackle many of the administrative defects.

In general, large businesses bear a disproportionate burden of taxation as compared to small businesses and individuals. This is supported by the revenue figures. Large businesses and their professional advisers report a perception of significant non compliance, under reporting and lack of enforcement in relation to businesses registered under the “small” businesses system. Small businesses can easily ‘close up shop’ in order to avoid their tax debts, and recommence business virtually the next day under a new name.

It has also been reported that many individual taxpayers are registering as small businesses in order to obtain more favorable taxation rates and to overcome the withholding requirements for salary and wage income. The revenue shortfall caused by lack of enforcement in relation to small businesses and individuals is then met through heavy handed compliance and enforcement activity for large businesses.

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