Changes to payroll tax provisions applying to employee share schemes
Introduction
From 1 July 2011, the NSW payroll tax liability on employee share schemes has been changed to reflect amendments made to the way the Commonwealth imposes income tax and fringe benefits tax.
From 1 July 2003 shares and options granted to employees, contractors and directors have been liable to payroll tax in NSW. From 1 July 2005 employers were given the choice to elect to declare the taxable value of the share or option as wages paid or payable, either when they were granted or vested. Under amendments which take effect from 1 July 2011, this option is still available.
In most other respects the NSW Payroll Tax Act 2007 remains consistent with the Commonwealth Income Tax and Fringe Benefits Tax legislation applying to employee share schemes.
Federal income tax and fringe benefits tax changes
Prior to 1 July 2009, employee share schemes were subject to income tax under Part 13A of the Income Tax Assessment Act 1936 (the 1936 Commonwealth Act). Share benefits provided to employees and directors that were not subject to these income tax provisions were generally taxed as fringe benefits.
In 2009, the Commonwealth income tax provisions were transferred, with a number of changes, to the Income Tax Assessment Act 1997 (the 1997 Commonwealth Act). The Commonwealth legislation giving effect to the changes was passed by the Federal Parliament in late 2009, but the legislation was retrospective from 1 July 2009.
Changes to NSW payroll tax
The NSW Payroll Tax Act has been amended to reflect the changes in the Commonwealth legislation. From 1 July 2011, an employee share scheme interest (ESS interest) as defined in section 83A-10 of the 1997 Commonwealth Act is subject to payroll tax under Division 4 of Part 3 of the NSW Payroll Tax Act 2007. The grant of a share or an option that is not an ESS interest under an employee share scheme is subject to payroll tax as a fringe benefit under Division 2 of Part 3 of the NSW Payroll Tax Act 2007.
Between 1 July 2009 and 30 June 2011 transitional provisions apply. Employers may apply either the payroll tax provisions applying prior to 1 July 2011 or the amended provisions.
Payroll tax in other states and territories
All other states and territories have agreed to amend their payroll tax legislation to maintain consistency with the Commonwealth. However, clients should check the legislation in other states to determine when the changes will commence.
Determining taxable value
Under the provisions that apply up to 30 June 2011, the value of shares or options provided under an employee share scheme is determined in accordance with the repealed provisions of the 1936 Commonwealth Act. From 1 July 2011 employers may choose an accepted market valuation method or a method prescribed under the 1997 Commonwealth Act.
The only non-market value method currently prescribed under the 1997 Commonwealth Act is for the valuation of unlisted rights or options, and it is the same method that was prescribed under the 1936 Commonwealth Act.
In the case of shares and options that are subject to fringe benefits tax, the value for payroll tax is the taxable value for fringe benefits tax purposes, grossed up by the Type 2 gross-up rate (i.e. the lower rate) applicable under the Commonwealth Fringe Benefits Tax Assessment Act 1986.
