For options granted after July 1, 2015, generally an employee is subject to income tax on the spread upon exercise of the options, on grant. However, employees may defer the income tax for up to 15 years provided certain conditions (eg, a real risk of forfeiture) are met.
Generally, the most common time for tax to be deferred until is the exercise of the options. However, where the shares issued on exercise of such options are subject to genuine disposal restrictions, income tax will be further deferred until those restrictions cease.
Where an employee ceases employment and the employee does not forfeit the option as a result, termination of employment will also be an earlier taxing event. The Australian government is considering removing termination of employment as a tax trigger.
Where exercise is the taxable event, the tax is the difference between the market value of the shares and the exercise price. If a taxable event occurs without a sale of the shares, and the shares are subsequently sold, generally only 50 percent of the capital gain is taxed if the shares are held by the employee (not through a company) for at least 12 months.
If a sale occurs within 30 days of a taxable event, then the sale is treated as the taxable event, and the sale price is used to calculate the tax payable.
In addition, beneficial tax treatment is available for startup companies meeting certain requirements.
Where options are granted to eligible employees, for "startup treatment" to apply, certain conditions for tax deferral must be met.
In those circumstances, the employee will only pay tax on the capital gain on the sale of the share issued on exercise.
Options granted between July 1, 2009 and July 1, 2015 are subject to a different tax regime.
Withholding & reporting
Tax withholding is not required unless the employee does not provide their tax file number to the employer.
The employer is required to report income received by an employee from an option to both the employee and to the Australian Taxation Office, and the employee is required to report such income on their annual tax return.
Option benefits received by employees in some Australian states or territories may be included in the determination of employer payroll tax and in some circumstances, in the determination of premium for workers compensation insurance.
Reimbursement made to the parent company for the cost of the option benefits (eg, the spread), pursuant to a written agreement, should enable the subsidiary to deduct such cost from its taxable income.