Removal of cessation of employment as a taxing point

26 November 2021

On 25 November, the Government introduced the legislation into Parliament to give effect to the Budget announcement to remove cessation of employment as a taxing event for Employee Share Scheme (ESS) interests. While the removal of tax on cessation of employment is most welcomed, it is also pleasing to see that the Government has listened to feedback during the consultative process to ensure that the change will apply to all ESS interests. It was originally proposed that the change would only apply to new ESS interests granted on or after 1 July of the legislation receiving Royal Assent, meaning that ESS interest currently on-foot would not be covered by the change. However, the legislation introduced into Parliament will apply to all ESS interests to which a deferred taxing point occurs on or after 1 July following the legislation receiving Royal Assent. In practice, this means that should the Bill be passed and Royal Assent granted by 1 July 2022, tax on cessation of employment will no longer apply from 1 July 2022.

The removal of termination of employment as a taxing point means:

• Employees who cease employment and retain their unvested equity (“good leavers”) are no longer subject to tax on the value of their equity on termination of employment. This will remove the significant cash flow burden that tax on cessation of employment imposed on many good leavers, as the tax was payable with the employee often not having access to the shares to fund the tax.
• The value being taxed should typically align to the time the award vests or is exercised and the individual has access to the shares.
• In a regulatory world where it is typically no longer acceptable to vest equity early for good leavers, we can finally align regulatory expectations with the individual tax treatment.
• Perhaps a return to simpler award instruments? The increased use of Indeterminate Rights was a valid means to alleviate cash flow complexities associated with tax on termination but it generated a host of administrative complexities relating to the way the equity needed to be reported. Could this reform be the return to a world before Indeterminate Rights and a move towards simpler and administratively less burdensome equity instruments?
• For companies that do not use indeterminate rights, but structure their awards as restricted shares or rights that convert to shares which are required to remain on foot post termination to allow the application of consequence (common among regulated financial services companies), the removal of tax on cessation of employment will be most welcomed.