Executive Option and Share Solutions

Transcription

1 Executive Option and Share Solutions

2 2 Executive Option and Share Solutions Important information General Advice Warning This document does not constitute advice and has been prepared by Commonwealth Bank of Australia ABN AFSL (Commonwealth Bank) without taking account of the objectives, financial situation or needs of any particular individual. Before acting on this information, you should consider its appropriateness to your circumstances and, if necessary, seek appropriate professional advice. This information should not be taken to represent actual performance and should not be interpreted as an indication or guarantee of future performance. Product Information Collar Options are offered under the Options and Lending Facility, a product of Commonwealth Bank which is administered by its wholly owned but non-guaranteed subsidiary Commonwealth Securities Limited ABN (CommSec), a Participant of the ASX Group and Chi-X Australia. A Product Disclosure Statement (PDS) is available and should be considered before making any investment decision about this product. Bank and Government charges apply. A copy of the PDS can be obtained by calling Commonwealth Bank on or ing structuredproductsdirect@cba.com.au The Exersale Facility is a service of the Commonwealth Bank. The terms and conditions, including fees and charges, of the Exersale Facility are available upon request and should be considered before making any decisions. Neither the Options and Lending Facility nor the Exersale Facility are bank deposits. Disclaimer We believe that the information herein is correct and any opinions or conclusions contained in this document are reasonably held or made as at the time of its compilation, but we make no warranty as to the accuracy, reliability or completeness of that information. To the extent permitted by law neither Commonwealth Bank, or any subsidiaries, or any of their respective employees or other person accept liability for any claim in respect of anything stated herein, and of the consequences of anything, done or omitted to be done by any person acting in reliance, whether wholly or partially, upon the contents of this presentation. No person shall act or omit to act on the basis of any information presented in this document without considering and if necessary taking appropriate professional taxation advice upon his or her own particular circumstances. Case Studies The case studies mentioned in this presentation are purely hypothetical and for illustrative purposes only. The accuracy cannot be guaranteed and future outcomes may vary markedly. Neither Commonwealth Bank, nor CommSec, recommend any particular financial product or service mentioned in this document. Financial Services Guide (FSG) Unless agreed separately, we do not charge any fees for any information provided in this presentation. You may be charged fees in relation to the financial products or other services the Bank provides, as set out in the relevant FSG and relevant Product Disclosure Statements (PDS). Our employees receive a salary and do not receive any commissions or fees. However, they may be eligible for a bonus payment from us based on a number of factors relating to their overall performance during the year. These factors include the level of revenue they generate, meeting client service standards and reaching individual sales portfolio targets. If you have a complaint, the Bank s dispute resolution process can be accessed in Australia on Risk Disclosure Investments using The Options and Lending Facility and Exersale Facility are not Bank deposits. Such investments are contracts entered into between investors and Commonwealth Bank of Australia on the terms set out in the Terms and Conditions and represent unsecured obligations of the Commonwealth Bank of Australia. The Options and Lending and Exersale Facility provide sophisticated financial products which may involve dealing in derivatives. Unless you are familiar with derivative dealings and such products, these products may not be suitable for you. Tax Disclosure Information on taxation is based on the continuation of current laws, as at the date of communication, and their interpretation which may be subject to change.

3 Executive Option and Share Solutions 3 Contents Introduction to Employee Share Schemes (ESS) 4 Taxation Considerations 4 Trading Policy Considerations 6 Executive Option and Share Solutions 6 Risks 8 Case Study: Exersale Facility 9 Case Study: Collar Facility 10 Find out more 12

4 4 Executive Option and Share Solutions Introduction to Employee Share Schemes (ESS) Share and option remuneration schemes are an accepted practice among Australian companies and can often form a substantial portion of an employee s wealth. Accordingly, it is important that employees fully understand the terms of the scheme to which they belong and the income tax treatment of options and restricted shares in order to protect their wealth and maximise value. Tax Considerations for ESS This brochure is designed to inform you of the choices in how you may deal with your shares or options that have vested. At Commonwealth Bank of Australia (Commonwealth Bank or the Bank) we are committed to helping you achieve your financial goals and we offer solutions to meet employees needs in managing their share and option positions. This section provides a brief summary of some of the tax issues you may face when dealing with your shares and options. This should not be taken as advice. To understand how these tax issues affect your personal circumstances and to obtain information on all other relevant tax matters you should contact your financial and tax adviser. Prior to July 2009, employees who received shares or options under qualifying employee share or option schemes were able to elect either to: defer when the discount from shares or options was included as assessable income; or pay income tax upfront. In the budget, changes were announced to the rules governing taxation of equity received through ESS, which were enacted as Division 83A of the Income Tax Assessment Act 1997 Cwlth (ITAA 1997). Under Division 83A, equity received through an ESS is generally taxed on acquisition unless: equity is at real risk of forfeiture; or the remuneration arrangement is an approved salary sacrifice employee share scheme. Under Division 83A if a taxpayer acquires a share or right as employment income, the assessable income of the taxpayer includes the difference between the market value of the share or right at the time of the relevant taxing point and the amount paid to receive the share or right (this value is called the discount ). A share or right must be provided at a discount to fall under the ESS legislation. While a right is not explicitly defined in the legislation it is generally taken to include an option.

5 Executive Option and Share Solutions 5 Division 83A applies to all ESS interests acquired from 1 July It also applies to ESS interests acquired before 1 July 2009 if they are qualifying shares or rights and if you did not elect to be taxed upfront under the previous law and a cessation time did not happen to the shares or rights before 1 July The remainder of this section deals with the tax considerations under Division 83A for a tax-deferred scheme where there is a real risk of forfeiture. If you acquire ESS interests under a tax-deferred scheme, you will be assessed for tax purposes in the year in which the deferred taxing point occurs. The amount included in your assessable income will be the market value of the ESS interests at the deferred taxing point, reduced by the amount paid to acquire the ESS interests. Deferred taxing point for shares will be the earliest of: 7 years from the grant of the award Cessation of employment When the shares are no longer subject to real risk of forfeiture and genuine disposal restrictions. Deferred taxing point for rights will be the earliest of: 7 years from the grant of the award Cessation of employment The right has not been exercised but it is not subject to real risk of forfeiture or genuine disposal restrictions There is no real risk of forfeiture of the right, the scheme no longer restricts exercise of the right and if the right is exercised there is no risk of the underlying shares being forfeited, and there are no restrictions on immediately disposing of the underlying shares. For capital gains tax (CGT) purposes, an ESS interest under a tax-deferred scheme is taken to have been acquired for market value immediately after the deferred taxing point. The income tax and CGT consequences on acquisition and disposal of an ESS interest acquired under a tax-deferred scheme are set out further below: Tax timing and consequences of tax-deferred ESS schemes Event/Time Income Tax Capital Gains Tax Grant of ESS interest Employee is not taxed at this point Employee is not taxed at this point Disposal of ESS interest within 30 days after deferred taxing point Disposal of ESS Interest more than 30 days after deferred taxing point Employee s assessable income will be the difference between the market value of the share or right at disposal (generally the disposal proceeds) and the amount paid to receive the share or right Employee s assessable income will be the difference between the market value of the share or right at the deferred taxing point and the amount paid to receive the share or right No CGT implications for the employee. Disposal date is the same as the deferred taxing point CGT implications will arise for the employee. CGT is calculated on the amount received on disposal minus the market value of the interest at the deferred taxing point and any incidental costs of disposal. CGT discount will apply where the interests are disposed of more than 12 months after the deferred taxing point The comments above should not be taken as advice. Refer to the Important Information at the beginning of this document. Taxation in relation to ESS is complex and subject to change. Holders are advised to seek their own independent taxation advice in relation to their personal circumstances.

6 6 Executive Option and Share Solutions Trading Policy Considerations Before dealing in any securities in relation to your ESS you should speak with your internal ESS contact to see what conditions exist around trading your equity interests. It is common that there may be restrictions and laws to comply with regarding the timing and use of hedging and borrowing arrangements, as well as prohibitions on trading around announcement periods. Commonwealth Bank Executive Option and Share Solutions As one of Australia s largest banks and top-tier brokers, Commonwealth Bank has a wealth of experience in providing investment solutions to both institutional and retail investors. We have a dedicated team to assist company employees develop and execute solutions to meet their needs. This includes hedging equity positions and funding the exercise and sale of options. Depending upon your desired outcome the following Commonwealth Bank facilities are available: Exersale Facility The Exersale Facility provides employees holding options an easy to implement and low-cost solution to unlock the value in their option holding without having to arrange to fund the exercise cost of the options. Commonwealth Bank will deal with the share registry to arrange your options exercise, sell your shares and pay you the difference. How does it work? Key Features: Fast and easy to implement Commonwealth Bank arranges the exercise and sale and you do not need to worry about funding arrangements Efficiency enables you to exercise options without having the funds or having to apply for a loan to fund the exercise Low cost solution No arrangement or borrowing fees. Brokerage charged on sale proceeds Access sophisticated trading strategies - we offer advanced execution methods including algorithmic trading to help you achieve your desired sale price. Day 0 Day 1 Day 2 Day 3 Client submits Exersale paperwork to the Bank The Bank arrange and fund the exercise of options with the share registry The Bank sells the shares on market The share registry delivers the ordinary shares resulting from the options exercise to the Bank The Bank settles the sale of shares The Bank credits the Net Sale Proceeds into the client s nominated account (Sale Proceeds less Exercise Cost less Brokerage) Confirmation letter is sent to client

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8 8 Executive Option and Share Solutions Collar Facility A Collar enables you to set a Protection Level for your shares, which reduces the impact of a large unexpected drop in the share price. An upside Cap is also set which means you will benefit from any share price gains to this level. A Collar can also give you access to a convenient loan facility to borrow up to the Protection Level of your shares which may be as much as 100% of the value of your shareholding. Key Features: Flexible investment terms up to 5 years Choose the Protection Level (between 50% to 100%) and fund up to this level Use the loan facility to borrow against an existing share holding and release cash for other investment purposes, or fund the exercise of executive options No margin calls. How does it work? Share Price Protection Level Cap Level Current Share Price Risks There are risks associated with the Collar and Exersale Facilities and include: Commonwealth Bank not performing its obligations under either of the facilities The expected tax implications of entering into one of the facilities may change as a result of changes in taxation laws and the interpretations of those laws With the Exersale Facility the share price may move in an adverse manner before you are able to capture the value in your options Capital protection on your Collar only applies at maturity. You may choose to break the agreement early, however break costs will apply If your Collar Protection Level is set below the purchase price, you will be exposed to a fall in the value of your securities, to the Protection Level With your Collar you will forego any gains on your shares that are above the Cap Level There is a risk that you may not receive any return from your Collar investment, as any capital gains, dividends and franking credits may be less than the interest, Collar premium and costs you pay. The risks associated with Collars are set out in further detail at Section 3.3 of the Options and Lending Facility PDS. Maximum borrowing potential Profit

9 Executive Option and Share Solutions 9 Case Study: Exersale Facility Situation Ian, an executive of XYZ Company (XYZ) was granted options in XYZ for zero consideration under a qualifying ESS tax-deferred scheme where the options were at real risk of forfeiture. The options with an exercise price of $20.00 vested with no restrictions placed on their disposal. At the time the options vested the XYZ share price was $ Ian discusses his financial position with his accountant and financial adviser, and is made aware that he will be taxed on the options in the financial year when they vest. Solution Ian chooses to sell all of his XYZ vested options before the expiry date through the Exersale Facility to help fund his tax liability. Ian provides the Bank with his documentation: XYZ Company Options Exercise Notice showing details of his options holding The Bank Exersale Facility application. The financial outcome for Ian using the Exersale Facility is as follows: The Bank funds the exercise price to the share registry and sells the XYZ stock into the market at a price of $50.00 The share registry delivers the Bank with XYZ shares, which the Bank uses to settle the sell trade in t+3 days Ian receives the sale proceeds minus the exercise amount and brokerage into his nominated bank account 3 days after the sale of the underlying XYZ shares. Sale proceeds ($50.00 x 10,000) $500,000 Exercise cost ($20.00 x 10,000) $200,000 Brokerage charged 1 (0.55% x $500,000) $2,750 Net proceeds to Ian 2 $297,250 1 Additional fees and charges may apply including for the late delivery of shares. 2 If you have an agreement with your financial adviser to pay them for the financial product advice they have provided to you, then at your direction we will collect that fee from this amount and pay it to your financial adviser on your behalf. Conclusion Ian receives a credit of $297,250 into his nominated bank account 3 days after instructing the Bank to execute the Exersale of his XYZ company options He has extracted the value out of the options which can be used to pay his tax liability and fund other interests He has not had to arrange financing to exercise the options.

10 10 Executive Option and Share Solutions Case Study: Collar Facility Situation Sarah is an executive of BBB Company (BBB) and was granted 15,000 shares in BBB under a tax-deferred ESS where the shares were at real risk of forfeiture. The consideration paid by Sarah for the shares was $2.00 per share. The shares vested to Sarah with no restrictions on disposal. At the time of vesting the BBB share price was $ Sarah discusses her financial position with her accountant and financial adviser, and is made aware that she will be taxed on the shares in the financial year when they vest. Solution Sarah decides she wants to continue holding her shares but would like downside protection and to extract funds for other investment opportunities. Sarah s financial adviser recommends taking out a Collar Facility and loan through Commonwealth Bank s Options and Lending Facility. The details of the Collar transaction are as follows: Term 2 years Current share price $47.00 Protection level (% of current share price) 90% Cap level (% of current share price) 130% Interest payable (variable) Interest cost % p.a. $31,725 p.a. Share value (15,000 x $47.00) $705,000 Collar loan amount ($47.00 x 15,000) x 90% Unprotected equity ($705,000 - $634,500) $634,500 $70,500 Collar cost (Sarah pays) $30,000 Net proceeds to Sarah 4 $604,500 3 The interest cost used in this calculation assumes an interest rate of 5.00% p.a. 4 Sarah will also need to pay interest on the loan facility and if the facility is terminated, early break costs will apply which could be substantial. Conclusion Sarah has been able to limit her downside risk whilst still participating in share price upside to the set Cap Level Sarah will continue to receive ordinary dividends and franking credits (subject to eligibility) Borrowing against the shares provides Sarah with $604,500 (after the Collar cost) to use for investment purposes Depending on her circumstances, Sarah may be entitled to deductions for interest incurred on the loan which may offset other assessable income, including as result of the shares vesting.

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12 Find out more To find out more about Commonwealth Bank s Executive Options and Share Facilities or to discuss other possible solutions, please call the Equity Product Sales team: Equity Product Sales equityproducts@cba.com.au CBA