October has been an important month for equity awards in Australia.
New Tax Rules
First, the Australian Government announced on October 14, 2014 that it would revise the tax rules applying to employee share plans. The legislation still needs to be written and will most likely be effective only for grants made on or after July 1, 2015, but it seems clear that the taxable event for stock options will revert back to exercise (as it was the case for options granted before July 1, 2009).
This is great news for companies that had stopped granting options to employees in Australia after tax rules effective July 1, 2009 provided for tax at the time the awards were no longer subject to a substantial risk of forfeiture (typically at vesting). Apparently, the Australian Government finally realized its mistake after many companies aggressively lobbied for changes and pointed out that, by not being able to grant options, they were not able to compete with companies in other countries that are able to use stock options to incentivize employees.
In addition to changing the timing of the taxable event for options, the Government also announced the new legislation would provide for favorable tax treatment for employees of certain start-up companies (defined as unlisted companies, with an annual turn-over of less than A$50 million, that have been incorporated for less than ten years). Provided they hold options or shares for a minimum period of three years, employees of such companies will be able to defer tax until they sell the shares and receive capital gains tax treatment (rather than income tax treatment) for the gain realized at sale.
Again, we will need to wait until the legislation has been drafted to understand the full impact of the proposed changes, but we expect a large improvement over the current rules. That said, for companies that are granting RSUs, the new rules are unlikely to make a big difference, as the taxable event will generally remain at vesting. In addition, it is likely the reporting requirements will remain in place, so companies that have granted awards in Australia for a while will need to track taxable events under three different tax regimes (pre July 1, 2009, from July 1, 2009 to June 30, 2015 and post July 1, 2015) and report accordingly.
For more information on the tax changes, please check out Baker & McKenzie’s client alert here.
And a New Class Order, Too!
The other big development was the issuance of a new Class Order exemption (CO 14/1000) on October 31, 2014 by the Australian Securities and Investment Commission (“ASIC”). CO 14/1000 replaces the current Class Order 03/184 and provides an exemption from the prospectus disclosure requirements in Australia for the grant of equity awards by companies listed on a recognized stock exchange for at least three months (without suspension for more than five trading days).
Ever since ASIC announced in late 2012 that it considered RSUs and SARs to be derivatives which could rely neither on most of the self-executing securities exemptions nor on Class Order 03/184, companies found themselves between a rock and a hard place, given that options were not desirable from a tax perspective but RSUs could be granted only if the company obtained specific relief from the prospectus disclosure requirements from ASIC. I had blogged about this predicament back in June 2014.
With the issuance of CO 14/1000, companies can finally grant RSUs and SARs again without having to obtain specific relief. It still remains the case that most of the self-executing exemptions (under Section 708 of the Corporations Act) are not available for RSUs and SARs, but reliance on CO 14/1000 should not be too onerous.
We are still digesting the new rules, but it appears that compliance with CO 14/1000 will be subject to similar requirements as under Class Order 03/184, most notably preparation of an Australian offer document that has to be distributed to grant recipients together with the other grant documents and a notice filing with ASIC.
To complete the notice filing, companies will need to fill out a prescribed form which will not be publicly available after filing. Companies will not need to make a new notice filing if they make changes to their grant documents (as is the case under Class Order 03/184). Instead, a new notice filing will be required only if the company establishes a new plan for which it wishes to rely on CO 14/1000. For ESPPs, it is still necessary to establish an account with an Australian bank in which payroll deductions must be held until the purchase date (however, it appears this account can now be established by the Australian entity, rather than the parent company).
In more good news, it seems companies that obtained specific relief from ASIC to grant RSUs and/or SARs will be able to continue to rely on the specific relief indefinitely (as long as they grant awards under the same plan), rather than start complying with CO 14/1000. Similarly, it appears companies relying on Class Order 03/184 for an existing plan can continue doing so, rather than having to comply with CO 14/1000. Therefore, companies that have offered their ESPP in reliance on Class Order 03/184 can continue to do so while starting to grant RSUs in reliance on CO 14/1000. Or, if companies want to avoid having to make new filings with ASIC for an existing plan under Class Order 03/184 (in case they modify their grant materials), they can start complying with CO 14/1000 and make the one-time notice filing (as described above).
Overall, both the changes announced to the tax rules for share plans, as well as the issuance of CO 14/1000, are welcome news for companies granting equity awards in Australia and remove most of the obstacles companies were previously facing. Here is to the regulators getting it right for once!