Loans for Shares

As a result, in view of the falling stock prices of some enterprises in recent years, a taxation obligation could arise even though the stock option was " under water " (the strike was above the value of the stock on which it was based). In addition, the transfer point does not always match the point at which the money falls into the hand of the transferee, so many individuals have to vote some of their stock option rights and must divest the resulting shares to cover the transfer taxes.

Drawbacks of the stock option gave (re)new(ed) lives choices such as benefit entitlements and credit-financed stock option schemes. More and more businesses are turning to loans financed stock option schemes (LFSPs) as an alternate instrument to reward their staff with own funds. Just like stock option products, an LFSP allows an employee to participate in the company's growing business, but without the taxation questions that can bother stock option managers.

An interest-free, fixed-term subrogation credit is provided by the company to allow the employees to purchase shares of the company at fair value. Due to the restricted possibility of using the loans, the employees are shielded from a downward credit exposure if the value of the shares drops below the amount of the loans due. Shares awarded under an LFSP are usually owned by an employer-operated trustee to give the company greater ownership of the shares before the transfer.

Dividend payments on the shares are usually used to repay the debt. As with any other stock or stock option plans, the employer may make access to the agreement conditional upon customary exercise terms, perform-ance barriers and expiration covenants. In contrast to the stock option plans, if the structure is correct, there is no taxation point for the employee in the case of non-forfeitability.

Nor does the employers have any obligation to report to the ATO and the worker that would otherwise arise if the agreement were governed by the ESS rules. Employees only have to be taxed when they finally decide to buy their shares. In addition, any profit from the shares is only taxed as a dividend, so that only 50% of the profit is taxed if the shares have been owned for at least 12 consecutive month.

Obviously, there are variations on the scheme described above and the characteristics of any capital regime must be taken into account in order to take due account of the fiscal impact of the scheme on the worker and the employers. Given that more and more rules and regulations are being implemented and optimised to deliver certain (and hopefully optimal) results for staff and the business, from period to period we see characteristics of these regulations that lead to accidental fiscal effects.

Whilst the ATO acknowledges that an unbiased assessment is not mandatory, the foundation of the assessment on which the business and its employees base themselves must be endorsed if it is contested by the ATO. As regards loans to stockholders on non-commercial conditions in the case of privately owned enterprises, Division VIIA may consider the interest-free part of the loans as a dividends.

Therefore, caution is required when granting a credit to an existing stockholder such as an existing LFSP or other plan participant in order to prevent the payment of a dividends to the stockholder. Workplaces that provide interest-free loans to workers will want to make sure that the FBT on the loans is not due for payment.

There are certain preconditions attached to the existence of the "other retention" principle. Specifically, it must be demonstrated that the credit is used for income-generating activities. Such is the case when there is a valid anticipation or probability that the shares purchased with the aid of the credit will earn taxable profit, usually in the shape of a dividend.

Employees must also be the recipients of the ancillary benefits. The retention rules that otherwise govern the loans are not applicable if the loans are granted to an employees of the employees, for example, their superkasse or spouses, and the FBT is due. If the value of the shares drops below the amount of the remaining loans, the agreement allows the employees to return the shares to settle the loans.

It is important in the structure of this element of the agreement that no FBT bond for a write-off arises when the employers are (or could be) required to grant all or part of the credit. Specifically, an employers must verify whether the fund-raising provisions are applicable to its agreement and whether there is an exempting regulation from the obligation to produce a public disclosing deed.

Given that a credit is granted by an employers to an employees, the regulations for providing support may also have to be taken into account and dealt with.