Wages for the purposes of the Payroll Tax Act 2007 include shares or options granted by the employer to employees or deemed employees, which can include contractors, directors or former directors, and members or former members of the company's governing body.
The share or option must be an employee share scheme interest within the meaning of section 83A-10 of the Income Tax Assessment Act 1997 (Cth) and be granted under an employee share scheme (ESS) within the meaning of that section.
Payroll tax applies to the value of any grant of a share or option.
For the purposes of payroll tax, the value of the share or option is its value on the relevant day. Employers can elect to treat the relevant day as either the:
- date that the share or option is granted to the employee, or
- vesting date.
An employer is taken to have elected to treat the wages constituted by the grant of a share or option as being paid or payable on the grant date if:
- the value of the grant of the share or option is nil, or the
- employer was to elect to treat the date of the grant as the relevant day the wages constituted by the grant would not be liable to payroll tax.
An employer is taken to have elected to treat the wages constituted by the grant of a share or option as being paid or payable on the vesting date if the employer grants the share or option to an employee but does not include its value in its taxable wages for the financial year in which the grant occurred.
Granting of shares or options
A share or option is granted to a person if:
- Another person transfers the share or option to that person other than, in the case of a share, by issuing the share to that person.
- In the case of a share, another person allots the share to that person.
- In the case of an option, another person confers the option on, or otherwise creates the option in, that person.
- The person otherwise acquires a legal interest in the share or option from another person.
- The person acquires a beneficial interest in the share or option from another person.
Vesting date for shares or options
Vesting date for a share
This is the earlier of:
- The date when any conditions which apply to granting the share have been met and the employee’s legal or beneficial interest in the share cannot be rescinded.
The date at the end of the seven years from the date on which the share was granted to the employee (the seven year vesting date for shares).
Vesting date for an option
This is the earlier of:
- When the share to which the option relates is granted to the employee.
- When the right under the option to have the relevant share transferred, allotted or vested is exercised by the employee.
- The end of seven years from the date on which the option is granted to the employee (the seven year vesting date for shares).
Where a share or option granted after 1 July 2007 has not been declared for payroll tax purposes before 1 July 2011 because the employer elects the relevant date to be the vesting date, the seven-year vesting date is the latest date for vesting unless the other specified vesting events occur before the end of the seven years.
Where the granting of a share or option constitutes wages, the amount of wages is the value of the share or option on the relevant day, less any consideration paid or given by the employee for the grant, excluding consideration in the form of services rendered.
The value of a share or an option is the market value or the amount determined as provided for in sections 83A-315 of the Income Tax Assessment Act 1997 (Cth) and division 83A of the Income Tax Assessment Regulations 1997 (Cth).
Share valuations for start-up companies
A new income tax concession for start-up companies was introduced in July 2015. For eligible companies, the concession reduces the value of the amount included in an employee’s assessable income in respect of shares or options acquired under an employee share scheme. Start-up companies making an offer of employee share scheme interests under an employee share scheme (ESS) need to determine the market value of the ESS interests they provide for the purposes of complying with the ESS provisions.
Since 1 July 2015, start-up companies have been able to use one of the two ‘safe-harbour' methods for valuing unlisted shares; the ‘net tangible asset’ method and the ‘comprehensive valuation method’. These were provided in the Legislative Instrument (Methods for Valuing Unlisted Shares) Approval 2015 issued by the Commonwealth Government.
For payroll tax purposes, companies can use the same safe-harbour methods for valuing their unlisted shares. If a start-up company chooses an alternative method resulting in a higher market value, we accept that value for payroll tax purposes.
Once companies determine the market value of their unlisted shares, they can, if necessary, use the calculation tables in Division 83A of the Income Tax Assessment Regulations 1997 (Regulations) to work out the value of unlisted options.
For the 2015-16 and 2016-17 financial years, companies that have used the safe-harbour methods to become eligible for the income tax start-up concession can apply for a refund from the State Revenue Office through PTX Express if payroll tax has been paid based on a higher share or option value than that based on one of the safe-harbour methods.
The safe-harbour methods can be used to value unlisted shares or options which in turn will determine their taxable value for payroll tax purposes. While employees can reduce the value of the employee share scheme interests to zero for income tax purposes if the relevant employer qualifies for the start-up concession, the employers cannot automatically reduce the value of the employee share scheme interests to zero for payroll tax purposes. They must use one of the safe-harbour methods to reach the valuation (which can be zero).
Withdrawing the grant of a share or option
Where the grant of a share or option is withdrawn, cancelled or exchanged before the vesting date for some valuable consideration other than a share or option, the date on which that occurs is deemed to be the vesting date and the taxable amount is taken to be the value of the consideration.
Forfeited or lapsed shares or options
The seven-year vesting date still applies to shares and options forfeited or lapsed prior to seven years from the grant date if the other specified events have not occurred where the employer has elected the vesting date as the relevant date.
However, in this case, the value of the shares and options at the seven-year vesting date is regarded as nil because they did not exist at that time.
Rescinding the grant of a share or option
Where an employer has included the value of a share or option in its payroll tax return based on the grant date, and the grant is subsequently rescinded because the vesting conditions were not met, the employer can reduce the taxable wages in their payroll tax return for the relevant financial year by the value of any previously declared share or option value. This reduction in the taxable wages would not apply in circumstances where the employee decided not to exercise the option.
ABC Pty Ltd granted shares to an employee in May 2014. The market value of the shares at the grant date was $2000 and the employee did not pay any consideration for them. The grant of the shares is subject to the condition that the employee does not cease employment with ABC Pty Ltd within the next two years.
ABC Pty Ltd declares the value of the shares at grant date and includes $2000 of taxable wages in its May 2014 payroll tax return. The employee ceases employment with ABC Pty Ltd in May 2015. The grant of the shares is rescinded because the employee ceased employment within the two-year period. ABC Pty Ltd can reduce its taxable wages in the May 2015 payroll tax return by $2000.
Shares or options as fringe benefits
A share or option granted that is not an employee share scheme interest is taxable as a fringe benefit under Division 2, Part 2 of the Payroll Tax Act 2007.