Share scheme contributions
The following questions and answers set out how to determine the market value of a share or an option granted to an employee, director or contractor under a relevant contract (hereafter referred to as a person) and the associated payroll tax liabilities.
The market value of shares and options is determined in accordance with Subdivision F of Division 13A of Part III of the Income Tax Assessment Act 1936.
Important dates
- When did shares and options become liable as wages?
The value of share and options schemes relating to services provided after 1 July 2003 are liable wages.
Payroll tax liabilities in respect of share schemes
- What is the relationship between share schemes and payroll tax liability?
Granting shares or options to a person by an employer in respect of services performed constitutes wages. The liability is based on the market value of the shares or options less any consideration paid or payable by the person for the share or option.
- When does an employer declare the value of the share or option?
Employers must declare the value as wages on the relevant day. The relevant day is either the date on which the share or option is granted to the person or the date on which the share or option vests in the person. In most circumstances an employer may choose which of these dates to declare the taxable value of the share or option.
In the case of shares, employers may choose to pay payroll tax when the shares are granted, or when they vest. A share will vest when the person has an enforceable interest in the share which can not be rescinded. Whichever date the employer chooses, the shares must be valued for the purpose of determining taxable wages on that particular day.
In the case of options, an employer may choose to pay tax when the options are granted or when they vest. An option vests on the first of either the date the share relating to the option is granted or the date a person exercises a right to have the share transferred or allotted to that person. If the options are never exercised, no liability will arise. If the options are exercised they must be valued for the purpose of determining taxable wages on the day they are exercised.
- When does an employer not have a choice of when to declare the taxable value of a share or option?
In certain circumstances, an employer does not have any choice as to when the taxable value of a share or option is to be declared:
where an employer does not include the value of a grant of a share or option in its taxable wages for the financial year in which the grant occurred, the wages constituted by the grant are taken to have been paid or payable on the vesting date of the share or option
where the value of a grant of a share or option is nil, such wages will be treated as paid or payable on the date that the share or option was granted
where the wages constituted by a grant of a share or option would not be liable to payroll tax on the date of the grant, such wages will be treated as paid or payable on the date that the share or option was granted.
- What value do shares and options have?
Values are determined in accordance with the Commonwealth income tax provisions less any contribution paid by the person for the share or option.
- Should I send the valuation report to OSR?
No, just keep a copy of the report along with other records required to be kept for payroll tax purposes, and produce it to OSR if requested to do so. Such records must be kept for at least 5 years.
- When are shares and options regarded as being paid or payable in NSW?
For the purposes of determining where the wages have been paid:
Shares or options in a NSW registered company are wages paid in NSW.
Shares or options in corporations registered in other States are taken to be paid outside of NSW.
For example:
An employee has options in a Victorian registered corporation but works full time in NSW in May and June. The relevant date is 30 June 2008. Therefore, despite the fact the wages are taken to have been paid outside NSW, working wholly in NSW means the value of the options are NSW wages.
An employee has options in a NSW registered corporation. The relevant date is 30 June 2008. The employee worked in both Victoria and South Australia in June. The value of the options are NSW wages as the employee is taken to have been paid in NSW and did not work wholly in one other State.
- What happens if the services of the persons have been performed both in and out of NSW over more than 1 month?
To simplify the liability for employers all the services are taken to have been performed in the month in which the grant or vesting takes place. This means that all of the value is liable in only one State.
- What is a NSW company?
A NSW company is a company incorporated under the Corporations Act 2001 (Cth) and registered in NSW. A company is also a body corporate that is incorporated under a NSW Act.
- Is a loan provided by an employer for the purpose of purchasing shares subject to payroll tax?
If a loan is a 'fringe benefit', its taxable value should be determined under the Fringe Benefits Tax Assessment Act 1986 (Cth), and the grossed-up value declared as payroll taxable wages. Under the Commonwealth legislation, certain loan benefits provided to employees are exempt, and are therefore also exempt from payroll tax.
- What is the impact on payroll tax liability if an employee share scheme is subject to an income tax exemption or concession?
An income tax exemption or concession applying to a share scheme has no impact on either the liability or the taxable value for payroll tax purposes.
- Are employers entitled to a refund if tax is paid when options or shares are granted, but are subsequently withdrawn because a condition or contingency was breached or not met?
Yes, provided the tax was paid, a reduction in taxable wages will be allowed, equal to the taxable wages on which tax was paid. This adjustment is made in the year in which the withdrawal occurs, not the prior year for which the tax was originally paid.
However, no reduction is available if options expire merely because they were not exercised by the relevant date or because the person fails to exercise his/her rights in respect of a share or option.
- What is the effect of withdrawing, canceling, or exchanging a share or option before the vesting date?
If a share or option is withdrawn, cancelled or exchanged prior to the vesting date for any valuable consideration (other than the grant of other shares or options):
the date on which this occurs is taken to be the vesting date
the market value declarable is taken to be the value of the valuable consideration
this value must be declared as payroll taxable wages on that date (if the value of the share or option was not declared when originally granted).
- If options are granted prior to 1 July 2003, and exercised on or after 1 July 2003, is payroll tax payable?
No, neither the options nor the shares are subject to tax.
- Is payroll tax payable on both the grant of options and the subsequent issue of the shares when the options are exercised?
No. Employers may choose to pay tax when the options are granted, or if and when the options are exercised. If tax is paid on the grant of the options, the subsequent issue of the shares when the options are exercised is not taxable.
- If options or shares are granted to or vest in a director after retirement or termination, is there a payroll tax liability?
Yes, but if tax is paid on the grant of options, whether before or after termination, the subsequent issue of shares is not taxable.
- If options or shares are issued to or vest in a person after termination is there a payroll tax liability?
Yes, provided the options or shares were granted prior to termination, unless tax was paid when the options or shares were granted.
Valuation of shares and options
- On what date should options or shares be valued for the purposes of determining the taxable value?
If an employer decides to pay tax on the grant of options or shares, they should be valued on the day they are granted.
In the case of shares, tax becomes payable on the day the share is granted or the vesting date. In the case of options, tax becomes payable on the granting date or the exercise date.
If the options are never exercised, no liability will arise. If an employer pays tax when the options are issued and they are never exercised, they are not entitled to a refund.
- What value is used in calculating the taxable value?
The value which must be used is the 'market value', determined in accordance with Subdivision F of Division 13A of Part III of the Income Tax Assessment Act 1936 (Cth).
- How do I determine the market value of listed shares and options?
The 'market value' of options and shares quoted on a recognised stock exchange is the weighted average of the prices at which those shares or options were traded during the one week period up to and including that day, where there has been at least one transaction during that period.
- What if there were no trades during that one-week period?
Where there was no transaction on the share or option in the one week period, the last price at which an offer was made during that period should be used. If there was no offer during that period, they should be valued in the same way as unlisted options and shares.
- What is the market value of unlisted shares?
The market value of unlisted shares is their market valuation as determined by either a registered company auditor or in accordance with a reasonable method approved by the Commissioner of Taxation (Commonwealth) under Subdivision F of Division 13A of Part III of the Income Tax Assessment Act 1936 (Cth), or by the Chief Commissioner of State Revenue.
- What is the market value of unlisted options?
The market value of unlisted options is their market valuation as determined by reference to the market valuation of the underlying share, the remaining exercise period of the right on the valuation date and the exercise price. (See Part III, Division 13A Subdivision F of the Income Tax Assessment Act 1936).
Any restrictions or conditions applying to the options or shares must be ignored in determining the value of the options or shares.
If the lowest amount which must be paid to exercise the option or right cannot be determined on the relevant day, the market value of the options is the same as the market value of the shares.
If tax is paid on this basis, but the options are subsequently withdrawn or rescinded because a condition or contingency is not met, the employer is entitled to an offsetting reduction in taxable wages for the return period when the withdrawal or rescission occurs. The amount of the reduction is the amount of taxable wages attributed to the options in a previous monthly or annual return.
Definition of stock exchange
- What stock exchange can I use?
If options or shares are listed on one or more approved Australian stock exchanges, you may nominate any one of them. You may nominate an approved overseas stock exchange if the shares are not listed on an approved Australian stock exchange.
- What is a recognised stock exchange?
'Recognised stock exchange' means:
Australian Stock Exchange Limited
Bendigo Stock Exchange Limited
Stock Exchange of Newcastle Limited
or an overseas stock exchange approved for the time being under regulation 152I (Schedule 12) of the Commonwealth Income Tax Regulations 1936 (Cth).
- If sales on a foreign stock exchange are used, and the sales are in a foreign currency, what exchange rate do I use?
The amount is to be converted to Australian currency at the rate of exchange last reported by the Reserve Bank before the liability to pay the tax arose; that is, on or immediately before the 'relevant day'.
