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The Government has announced reforms to the tax treatment of Employee Share Schemes.

Currently, employees are taxed on any discount received on the issue of shares or options in their employer company.  Under the current rules, the employees can become subject to tax at a point in time before they can dispose of the shares or options, so they are effectively taxed before realising the income.

Under the proposed reforms, the Options issued by young, unlisted SME companies will not be subject to tax until the earlier of conversion of the Options to Shares, sale of the Options, or at the end of an extended 15 year deferral period (currently 7 years).

While this is certainly a step in the right direction, in our view, the Government needs to remove 'conversion of the Options' as a taxing point because in some circumstances this may still lead to a taxing point where there is an inability to realise the value in the underlying shares to pay the tax.

While the reforms will be subject to consultation, they are proposed to apply from 1 July 2015.

Please refer to the Government Media release:  http://bfb.ministers.treasury.gov.au/media-release/055-2014/