Has the Federal Budget changed how your shares are taxed?

In a bid to attract talent to Australian companies, this year’s Federal Budget is making changes to tax defered employee share schemes.

A woman with the word 'tax' scribbled around her, plugs her ears and grimaces, indicating the impact of tax on share price

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In a bid to attract and retain talent to Australian companies, this year’s Federal Budget is making changes to tax-deferred employee share schemes.

The major change is the removal of the cessation of employment taxing point for tax-deferred employee share schemes, which was part of a Government inquiry last year.

Currently, employees are taxed on shares they receive as an employment incentive when they leave their job.

This sometimes meant that former employees were taxed on shares they didn’t have yet.

Under the changes, workers won’t pay tax on shares from an employee share scheme when leaving their job, but rather at one of the three other points.

Let’s take a closer look at the changes.

Tax and employee share schemes

The changes outlined in the Federal Budget mean Australian’s who receive shares as part of an employee share scheme won’t be taxed on them upon leaving their job.

Instead, they’ll be taxed at one of two points: when there is no risk of forfeiture and no restrictions on disposal, or at the maximum period of deferral. The maximum period of deferral is 15 years after receiving shares.

If an employee received options, they will be taxed after they exercise the option when there is no risk of forfeiting or restrictions on disposing of the resulting share.

It is also improving regulations to the employee share scheme regime. The Government says the changes are an attempt at “reducing red tape”. It hopes they will also make it easier for companies to offer employee share schemes. Thus, giving Australian workers a greater share of the value they helped create.

The Federal Budget states the Government will be removing regulatory requirements for businesses that provide free shares as employee incentives.

It will also remove disclosure requirements, anti-hawking and advertising prohibitions as well as exempt offers from licensing.

Unlisted companies will also be able to offer more shares to their employees. They can now offer up to $30,000 worth of shares to their employees each year. That’s been increased from $5,000.

The changes are to come into effect on 1 July 2021.

Motley Fool contributor Brooke Cooper has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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