Australia Changes Tax Stance on Employee Share Schemes

The Australian Taxation Office has reversed its stance on the tax treatment of trustee dividend-equivalent payments to participants in employee share schemes.

The ATO’s June 8 draft guidance, Draft determination TD 2017/D2, deals with circumstances in which an employer establishes a trust to provide shares to employees under an employee share scheme (ESS). It focuses on situations in which the trustee makes dividend-equivalent payments to employees out of dividends on which the trustee had previously paid tax at the top marginal rate.

The determination states that a dividend-equivalent payment to an employee in these circumstances will be treated as assessable to the employee, overturning the ATO commissioner’s 2013 position that it wouldn’t be assessable as the trustee would already have been taxed at the top rate.

ATO ‘Got It Right’

ATO’s revised stance is unsurprising and interprets tax law correctly, Allens managing associate Shaun Cartoon told Bloomberg BNA June 27.

The new guidance “will be resisted because industry practice has been to treat such amounts as non-assessable to the employees, to prevent what some would argue is double-tax on the same amount,” Cartoon said in a phone interview.

However, he said the ATO’s new guidance was technically correct under the tax rules.

“My view is that the ATO has now got it right,” he said.

A dividend-equivalent payment was a form of taxable cash bonus to an employee, even if the trustee had also paid tax on the underlying dividends, he said.

The ATO proposed “quite a generous grandfathering” for existing arrangements, as the new approach will only apply to dividend-equivalent payments where they are paid under the terms and conditions attached to ESS interests issued on or after 1 October 2017, he added.

‘Double Taxation’

Clayton Utz partner Mark Friezer said he thinks the draft determination will result in a form of double taxation.

The ATO’s proposed new approach “means that the underlying dividend income will be taxed twice before it is received by the individual—most likely at the top marginal rate on each occasion,” Friezer told Bloomberg BNA in emailed comments.

“This is effectively double taxation of the dividend income and will require companies that operate such employee trusts to redesign their arrangements—otherwise employees could face an effective tax rate on those dividends in excess of 70 percent,” he said.

Additional Guidance

Meanwhile, the ATO June 8 also released draft practical compliance guideline PCG 2017/D9 that details the safe harbor terms on which the ATO will accept that a dividend-equivalent payment to an ESS participant isn’t connected with the employee’s employment and isn’t assessable as ordinary taxable income.

Cartoon is unimpressed by it.

“I’ve never seen a share plan where a dividend-equivalent amount might become payable, which would fit within the commissioner’s safe harbor rules,” he said.

The ATO on the same day also issued Draft Ruling TR 2017/D5 on employee remuneration trusts, which replaces a 2014 draft ruling.

The only difference is that the new draft ruling excludes rights or shares that are taxed under the employee share scheme provisions of the Income Tax Assessment Act, “which will be welcome news for listed companies operating employee share trusts,” Cartoon said.

Comment closes July 7 on TD 2017/D2 and PCG 2017/D9. Comment is due by July 21 on TR 2017/D5.