ESS interests acquired before 1 July 2009
The current ESS rules apply to all ESS interests acquired from 1 July 2009.
The current rules contain transitional arrangements that apply to some ESS interests that were acquired before 1 July 2009. The transitional arrangements apply to calculating the amount of the discount to be included in assessable income for a transitioned ESS interest.
There were no employer reporting obligations under the previous law. However, you will need to know how the transitional arrangements apply to shares and rights provided under the previous law to fulfil your reporting obligations under the rule changes.
When the current ESS rules do not apply
The ESS rule changes do not apply to an employee who acquired ESS interests before 1 July 2009 if they were:
- non-qualifying shares or rights
- qualifying shares or rights, and your employee elected to be taxed upfront under the previous rules
- qualifying shares or rights, and a cessation time had happened to the shares or rights before 1 July 2009.
In these cases, the previous law will continue to apply.
Example: No requirement to report
Adrian acquires 750 non-qualifying rights from his employer, Begone Ltd, on 27 September 2007, under an ESS. As the rights are non-qualifying he is taxed in the year of acquisition. Begone Ltd is not required to report on these rights, even if they are exercised after 30 June 2009.
End of example
When the current ESS rules do apply
The changes apply to ESS interests that are qualifying shares or rights your employee acquired before 1 July 2009 if:
- your employee did not elect to be taxed upfront under the previous rules
- a cessation time did not happened to the shares or rights before 1 July 2009.
Example: Requirement to report under transitional arrangements
Sam acquires 2,000 qualifying options from her employer, Aztec Ltd, on 12 May 2008, under an ESS. She does not elect to be taxed upfront. On 8 April 2012 Sam, who is still employed by Aztec Ltd exercises her options. Under the transitional arrangements, Aztec Ltd must report on these options.
Aztec Ltd would be required to report on these options even if Sam had elected to be taxed upfront.
End of example
Deferred taxing point
Transitioned ESS interests will have a deferred taxing point that is determined by reference to the cessation time worked out using the previous law. The market value of the ESS interests at the deferred taxing point is worked out using the current law.
The 30-day rule will also apply; therefore, if your employee disposes of their ESS interest (or the share acquired on exercise of the right) within 30 days after the deferred taxing point, the deferred taxing point becomes the date of that disposal.
Example: Options acquired before 1 July 2009 and transitioned into the current rules
On 18 May 2007, Hillary acquires 10,000 options in her employer, Diesel Ltd, under an ESS. The options are qualifying rights and Hillary does not elect to be taxed upfront. On 10 March 2015, she exercises her options. That is the cessation time under the previous law.
Under the transitional arrangements, the deferred taxing point for Hillary’s interests is the cessation time worked out under the previous law. Therefore, 10 March 2015 is the deferred taxing point for these options.
End of example
Reporting requirement for pre-1 July 2009 interests
The current rules about your reporting apply to all qualifying shares or rights acquired before 1 July 2009 if no cessation time had occurred before 1 July 2009, whether or not your employee made an election to be taxed upfront. This means that you must report the discount on ESS interests acquired before 1 July 2009 if a cessation time occurred during the income year, whether or not your employee made an election.
No TFN withholding
You do not need to withhold tax if your employee has not given you their TFN or their ABN and they have a deferred taxing point for shares or rights that they acquired before 1 July 2009.
If your employee has been employed outside Australia and has a deferred taxing point for shares or rights they acquired before 1 July 2009, they do not include in their assessable income the amount of the discount from those shares or rights that relates to that foreign employment.
Other transitional rules
The law changes also modified the way the rules apply to:
- the acquisition date of some shares or rights for certain capital gains tax (CGT) purposes
- certain shares or rights, for the meaning of an employment termination payment.
The current ESS rules apply to rights acquired before 1 July 2009 that became rights to qualifying shares after 30 June 2009. If a possible cessation time happens to those rights after 30 June 2009, (whether or not your employee has made an election), you must provide an ESS statement to your employee and an ESS annual report to us for the income year that the possible cessation time occurs in.
There is no reporting requirement if the rights are not qualifying or if the cessation time for the rights occurred before 1 July 2009.
The current law may apply to shares or rights acquired before 1 July 2009.