TAX NEWS - 2010

Australia Tax: Clarification of employee share plan reporting requirements

Background

On December 2, 2009, the Australian government adopted legislation containing broad reforms regarding the taxation of employee share plan benefits, which apply retroactively to awards granted on or after July 1, 2009. Among other changes, the new legislation revised the employer reporting requirements with respect to employee share plan benefits and, as we near the June 30 close of the Australian tax year, the Australian Taxation Office (ATO) has provided additional guidance with respect to this obligation. Presented below is an overview of the mandatory and optional reporting requirements for the 2009/2010 tax year.

As discussed further below, the first deadline for the new employee share plan reporting requirements is July 14, 2010. Of note, final versions of the new employee share plan reporting forms are expected to be released shortly by the ATO and, when released, such forms will be posted on the ATO website.


Overview of mandatory reporting requirements

The provider of an employee share plan interest (which, in many cases, may be the foreign parent company of the local Australian employer), will be required to provide an "employee share scheme statement" to each participating employee by July 14, 2010, as well as an annual report to the ATO by August 14, 2010. The provider may appoint an agent (e.g. the local Australian entity which employs the award recipient or the share plan administrator) to fulfill the reporting requirement on its behalf. These deadlines apply to all taxable share plan events that occurred during the tax year ending on June 30, 2010, regardless of whether the share plan award was granted pre or post-July 1, 2009.

In order to clarify the specific share plan reporting requirements, and the relevant forms that will be used, the ATO has established an employee share plan working party consultation group. As mentioned, the final version of the employee share scheme statements and the annual reporting form have not yet been released, though we understand the following information will be required on such forms for the 2009/2010 tax year:

- The number of shares or rights (e.g. stock options) which were subject to tax at grant – a separate disclosure will be required for awards that do and do not qualify for the A$ 1,000 upfront tax exemption;

- As estimate of the "discount" (i.e. taxable amount) from shares or rights which were subject to tax at grant – a separate disclosure will be required for awards that do and do not qualify for the A$ 1,000 upfront tax exemption;

- An estimate of the taxable amount from shares or rights with a deferred taxing point (i.e. awards where taxation has been deferred past grant), where the deferred taxing point occurred during the 2009/2010 tax year – a separate disclosure will be required for awards that were granted prior to July 1, 2009 (since pre-July 1, 2009 awards will not be governed by the new share plan legislation, the deferred taxing point for these awards will be the point of "cessation" as per the previous Australian share plan legislation);

- The amount of any tax withholding where the employee has not provided a Tax File Number (TFN) or Australian Business Number to the employer; and

- Certain administrative details of the employer and each participating employee with a reportable event (as described above) occurring during the tax year, including the employee's name, address, date of birth, and TFN.


Overview of optional reporting requirements

Of note, which respect to the employer's annual report to the ATO, several items which were initially labeled as mandatory, are now considered to be optional for the 2009/2010 tax year:

- In the year of grant, the number of shares or rights that satisfy the conditions for a deferral of taxation (i.e. awards which will not be subject to tax at grant, but rather one of the deferred tax points);

- In the year of taxation, the foreign-source portion of the taxable amount – this would typically be the portion of the taxable amount considered to be related to services performed outside Australia, typically over the grant to vest period of the award; and

- In the year of taxation, the number of shares or rights received by the employee from a foreign source or foreign employment

Nevertheless, these optional items may be mandatory in future years.


Additional considerations

Other practical matters that employers should take note of include:

- For purposes of calculating the taxable amount, the provider of the employee share plan awards (e.g. the foreign parent company of the Australian entity) can ignore the rule that tax will be due on the gain at sale if the employee sells the underlying shares within 30 days of what would otherwise have been the deferred tax point. In such cases, the provider may continue to calculate the taxable amount based on the value at the deferred tax point;

- In certain cases, the provider of the employee share plan awards may not be aware of whether an award was subject to tax prior to July 1, 2009 (pursuant to employee election to pay tax at grant under the previous share plan legislation) and, therefore, whether the new reporting requirements will apply to such awards. In such cases, it may be prudent for the provider to report the details of the share plan benefit at what would otherwise be the deferred tax point;

- For the 2009/2010 tax year only, employers are not required to send employee share plan statements to employees earning less than A$ 150,000 if they only participate in a plan eligible for the A$ 1,000 tax exemption. However, employers are still required to report the details of such awards in the annual report due to the ATO by August 14, 2010;

- The ATO is expected to issue its views on a number of other share plan matters (e.g. determination of market value, and the "real risk of forfeiture" test) shortly; and

- The working party consultation group will continue to meet beyond July 2010 to resolve any subsequent share plan issues that arise.


Action

- Companies should confirm that they understand the methodology for calculating the taxable value of their share plan awards.

- Companies should confirm their in-house resources responsible for share plan reporting, as well as the level of assistance they may need from external vendors.

- Companies should collect all information relevant to share plan reporting (such as grant and vest details).

- Companies should review their internal processes to track and record all share plan transactions that need to be reported (including mobile employee movement during the life of an award).

- Companies should consider contacting the ATO if they are having trouble complying with the reporting deadlines for the 2010 reporting year.

- Companies should remain in frequent contact with their tax advisors to stay advised of further developments impacting share plans, including final versions of the 2009/2010 reporting forms.