ATO guidance on ESS rules
New employee share scheme rules began to apply from 1 July 2015 and the changes are primarily limited to shares or rights issued from 1 July 2015 onwards.
New employee share scheme rules began to apply from 1 July 2015 and the changes are primarily limited to shares or rights issued from 1 July 2015 onwards. That is, you will generally need to apply the old rules to shares or rights that were issued before 1 July 2015.
One of the practical challenges under the ESS rules is the need to determine the market value of the rights and shares of the company issuing the ESS interests. While the valuation issue may be relatively straight forward when dealing with listed shares and rights, the position can be more difficult and costly to determine when dealing with unlisted shares and rights.
While the previous rules provided some short cut valuation approaches for certain unlisted rights, the new rules provide the Commissioner with the power to approve market valuation methodologies that can be used by taxpayers to comply with the ESS rules. An approved valuation methodology would be binding on the Commissioner as long as the taxpayer has satisfied any relevant conditions.
Since the rules became law the ATO has issued ESS 2015/1, which sets out two methods for determining the market value of unlisted ordinary shares in a small start-up company.
One method is based on the net tangible assets of the company while the other method allows the CFO of the company to determine the value, which must then be endorsed in a written resolution by the directors. The company does need to meet some conditions to be able to utilise these methods.
In addition, the ATO has issued a new ESS calculator, which might help employers in calculating the amounts to include on an employee's ESS statement.
For more information about ESS and how it can benefit your business, please contact us on 02 9957 4033.
This article is provided for information purposes only and correct at the time of publication. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.