Tax Issues Impacting Plan Design Case Study

Transcription

1 Tax Issues Impacting Plan Design Case Study Sarah Bernhardt, Partner, Allens Sandra Buth, Principal, Deloitte Angela Perry, Chair, Employee Ownership Australia

2 Case Study Sample Co is an ASX Listed Company which currently operates the following employee share plans: Performance Rights Plan Restricted Share Plan All Employee Share Plan Sample Co has sought advice on whether it should make any changes to the design of its share plans (or introduce new plans) as a result of recent tax and regulatory changes in Australia. 2

3 Performance Rights Plan Senior employees of Sample Co are granted a conditional non-transferrable right to acquire up to a specified number of shares in Sample Co 3 years after grant of rights. The number of shares the employee will receive on vesting will be based on performance conditions measured over the 3 year vesting period. If the employee leaves employment with Sample Co before the vesting date, the rights lapse (unless good leaver). 3

4 Taxing Time for Performance Rights Old vs New Law Taxing Time for Performance Rights Old Law Earlier of:* (a) cessation of employment; (b) If no genuine disposal restrictions apply from vesting - vesting (c) If genuine disposal restrictions apply from vesting lifting of restrictions (d) 7 years from grant of the award *assumes there is a real risk of forfeiture on grant New Law Earlier of:* (a) cessation of employment; (b) If no genuine disposal restrictions apply from exercise - exercise (c) If genuine disposal restrictions apply after exercise lifting of restrictions (d) 15 years from grant of the award *assumes rights are non-transferable and scheme documents have tax deferral wording 4

5 Add an exercise period post vesting? Should changes to Performance Rights Plans be made? Provides employees with flexibility to manage their taxing time Increased costs for the company? Managing the exercise process (how long an exercise period?) Dividend equivalents post vesting? If purchased shares are to be used bucket trust costs? Add a cash discretion for good leavers? Consider adding options with an exercise price to the LTI mix? 5

6 Restricted Share Plan Sample Co s remuneration policy dictates that a fixed percentage of remuneration of selected employees is to be provided in shares in Sample Co under a Restricted Share Plan. The awards granted under the Restricted Share Plan are unable to disposed of until 2 years after the awards are granted. 6

7 Taxing Time for Restricted Share Awards - Old vs New Law Form of Award Taxing Time for Restricted Share Awards Shares Rights to shares Old Law Earlier of:* (a) cessation of employment (b) lifting of GD restrictions (c) 7 years from grant * assumes the company operates a general share plan and that there is a real risk of forfeiture on grant. Earlier of:* (a) cessation of employment; (b) If no GD restrictions apply after vesting - vesting (c) if GD restrictions apply after vesting lifting of restrictions (d) 7 years from grant *assumes there is a real risk of forfeiture on grant New Law Same as old law (except 15 years instead of 7 years) Earlier of:* (a) cessation of employment; (b) If no GD restrictions apply after exercise - exercise (c) if GD restrictions apply after exercise lifting of restrictions (d) 15 years from grant *assumes rights are non-transferable and scheme documents have tax deferral wording 7

8 Should changes to Restricted Share Plans be made? Should Restricted Share Plans become Rights Plans? Does Sample Co want the Restricted Share Plan to also cover fixed remuneration (where real risk of forfeiture may be an issue)? Dividends vs dividend equivalents? Bucket trust costs? Should an exercise period be added to Rights Plans? Pre or post vesting and for how long? Should a cash discretion be added for good leavers? 8

9 Broad based plans All employee share plans Calls for specific tax changes for plans for broad based employees New employee share scheme for start ups (adopted) Calls for increase in $1,000 tax exemption (not adopted) 9

10 All employee share plans Startups Summary of startup tax rules Definition of start up No equity interests in employer listed ESS interests in company incorporated <10 years before ESS interest acquired. All companies in corporate group incorporated <10 years before the ESS acquired ESS interests in company with aggregated turnover $50 million for the income year prior to the income year in which the ESS interest acquired Employing company (which may/may not be the company issuing the ESS interest) must be an AU resident taxpayer General and specific conditions General conditions that apply to all ESS concessions: the employment condition, ordinary shares conditions, integrity rule about share trading companies condition and significant ownership and voting rights condition Specific conditions for the start up scheme: the scheme must meet the existing minimum holding period condition and the scheme must meet the existing broad availability condition Rights Must have an exercise price (or strike price) that is greater than or equal to the market value of an ordinary share in the issuing company at the time the right is acquired Shares Must be acquired with a discount of less than 15 per cent of the market value of the share when acquired Tax Discounts on shares will not be subject to income tax Discounts on rights will be treated as capital and deferred until sale of the resulting share 10

11 All employee share plans Changes to share purchase plans for new tax rules Example: Sample Co operates a share purchase plan which allows employees to purchase up to $5,000 of Sample Co ordinary shares a year. Employees who participate in the plan are awarded with a 1:1 employer match Original shares purchased at market value on a pre-tax basis (i.e. salary sacrificed) and employee is prohibited from selling the original shares for two years at which time the employee is entitled to the employer match 11

12 All employee share plans Changes to share purchase plans for new tax rules Adding exercise to forfeitable match allows employee to manage taxing time on match Added complications to company in tracking and employee share scheme reporting Not suitable for broad based plans? Exercise windows? 12

13 All companies ESS tax summary All companies 1 July July 2015 New ESS tax rules Acquired before 1 July 2009 Acquired 1 July June 2015 Acquired on or after 1 July 2015 For qualifying shares or rights: tax point at delivery or exercise (or on cessation of employment with company or 10 years after acquisition) Able to elect tax at acquisition in cases where certain conditions are fulfilled Qualifying shares or rights: tax point at vest (or on cessation of employment with company or 7 years after acquisition) Not-qualifying shares or rights: tax point at grant Qualifying shares or rights: tax point at exercise (or on cessation of employment with company or 15 years after acquisition) Not-qualifying shares or rights: tax point at grant 13

14 Non executive director shares Non Executive Directors Example: Sample Co requires non executive directors to hold shares 1. NED voluntarily elects to contribute an amount equivalent to a percentage of after-tax director fees (up to 100% for that year) to acquire ordinary shares in Sample Co. under the NED Shareholding Plan. Once an election has been made no change except in cases of exceptional circumstances, such as financial hardship 2. NED contributes an amount equivalent to 50% of annual base director fees to acquire ordinary shares in Sample Co (NED shares). These arrangements are referred to as the Plan 3. NED receives an initial grant of incentives (performance rights) equal to 100% of annual director fees with subsequent grants equal to 33% of annual director fees. Minimum vesting period of 12 months service 14

15 Non Executive Directors Non executive director share ownership Company to decide as a matter of good governance whether or not NEDs should have equity ownership How to deliver e.g. share purchase to meet holding level e.g. director fees delivered in securities Changes to NED share ownership for new tax rules? No performance hurdles as conflict with a NED s capacity to provide independent oversight of management Tax deferral? 15

16 Global plans Deloitte global share plan survey 2014: what type of plans are companies operating globally? Bonus Deferral Share Purchase Share Option Share Awards 16

17 Closing comments What are listed companies doing and what does the future hold? 17

18 Thank You Sarah Bernhardt Partner Allens Sandra Buth Principal Deloitte Angela Perry Chair Employee Ownership Australia