Foundations of Taxation Law

The most common ways employers remunerate their employees are by paying them salary, providing them with fringe benefits and making contributions to their superannuation funds. A special way that a company can remunerate its employees is by allowing them to acquire shares, or rights to acquire shares, in the company at a discount. Issuing shares or rights to employees is a cost-effective form of remuneration as it does not require the company to pay them any money. It also helps a company attract talented staff, increase staff loyalty and reduce staff turnover. By giving employees a stake in the company, the interests of employees are more closely aligned with the interests of their employer. This has the potential to lead to greater employee commitment and boost corporate productivity.

The tax legislation contains special rules that apply where companies provide their employees with shares, or rights to acquire shares, at a discount. These arrangements are commonly known as ‘employee share schemes’ (‘ESSs’). The tax treatment of ESSs was originally dealt with under s 26AAC ITAA36. However, this provision was replaced by div 13A of pt III ITAA36 (which applied to shares, or rights to acquire shares, acquired from 28 March 1995 to 30 June 2009). Division 13A was subsequently replaced with new rules contained in div 83A ITAA97, which commenced on 1 July 2009.