The other thing I forgot to add (which could actually be quite important...) is one of the issues is the shareholiding % and voting power %.
As I understand it if you have more than 5% of shares or 5% of votes, the ability to defer doesn't apply and you have to tax upfront, irrespective of the vesting date (or deferral date) of the shares. Therefore, so long as you hold 5% (I would say fully vested to be safe) then future vesting shouldn't be a problem as you will already have paid tax on these (if any). This "exemption" from deferral could work for founders, but probably not general employee incentives. For general employee incentives I would use a standard loan scheme with buyback rights with "good leaver" and "bad leaver" provisions. Regards Adrian On Feb 22, 11:48 pm, Michael Overell <michael.over...@gmail.com> wrote: > Thanks all for the input so far. Added to many other discussions I've > had this week, it's clearly a complicated question. > > We're seeking further advice, but the consensus so far aligns with > Adrian's point: Shares vested or issued at a later date, if at a > discount to 'market value', will cause a tax problem for founders. The > discount is taxable as ordinary income in that year, unless certain > conditions are met to defer the taxing point. As a company, you may > also have the ATO sniffing about your 'fair market value' every time > you issue new shares. > > Implication (imho): > US-style founder vesting schemes (with vested shares issued over time) > are not practical in Australia. Or at least, are not founder > friendly. I plan to follow up with Niki and the Startmate crew, > because their open-sourced docs (which are clearly awesome), do seem > to follow a US approach. > > When it comes to tax and structuring, I prefer simplicity. Geoff's > loan / unit trust scheme makes me a little nervous on that basis, > although it does appear to solve the biggest issues. > > We're currently testing this as a working hypothesis, which might be a > simple way to get the same effect as vesting, without the obvious tax > issues: > > 1. All shares are issued to founders upfront. > > 2. If a founder stops meeting their vesting criteria, the Company has > the option to buy back a proportion of their shares at the issue > price. > > 3. If the company elects not to buy back that proportion of shares, > the shares will be transferred to the remaining shareholders in > proportion to their ownership, at the issue price. > > 4. The founder can continue holding the proportion of shares that were > not subject to buy back or transfer. > > 5. Schedule: The proportion of founder shares that are subject to the > buy back or transfer condition will reduce over a period of X years > from the effective date. > > We are seeking proper advice on this approach, but I wanted to throw > it out to the forum. > > Could it be a tax effective way to achieve the same outcome as founder > shares 'vesting' over time? > > Cheers! > > Michael Overell > mich...@recruitloop.com+61 408 791 > 984begin_of_the_skype_highlighting +61 408 791 984 > > On Feb 22, 10:28 pm, Adrian Bunter <adrian.bun...@gmail.com> wrote: > > > > > This is a very complex area, and one that actually a lot of tax > > accountants don't know and therefore just get it wrong. There were > > also rule changes that took effect from 1 July 2009. Some people still > > think under the old rules. > > > Don't consider this as tax advice and get some for your situation from > > an accountant who actually knows the rules. > > > Some general comments: > > > Vesting or Issue at some later date, if it is at a discount to the > > then value, is likely to cause a tax problem (ie the "discount" > > received being taxable as ordinary income to the employee). > > > Re the suggestion re setting up a unit trust and lending it the funds, > > you don't actually need a unit trust, you can just issue the shares > > and have the company lend the employee the funds via an employee loan > > plan scheme. Because the employee "pays" for the shares by taking out > > the loan, there is no discount. The company often gets buyback rights > > to buy these back at some pre-determined price. Downside is that there > > are an increased number of shareholders which may make things a little > > more complicated, but take it into account in the shareholders > > agreement and think about voting rights and possibly other power of > > attorney rights to "control" the shares. > > > The loan scheme works well for employees, but possibly not founders. > > If the founders have really issued themselves shares right upfront, > > then the value of these shares should be nominal as there is nothing > > in the entity at that time and they should have actually already > > vested. > > > If you get granted shares with deferred vesting you must defer the > > taxing point under a range of circumstances. One of the requirements > > it that the shares are ordinary shares. So if you feel like some "fun" > > you can actually read the tax legislation on this, as this is one part > > that does actually make sense and you can follow it. Also read the ATO > > guides on this as they are pretty good. By doing this you can > > understand the exact rules and you can work out some of the "work > > arounds" to appear to ensure up-front taxing, even if there are > > deferred vesting dates (that is, if you don't want to use a loan plan, > > which is probably the easiest way). > > > Good luck. > > > Regards > > Adrian > > > On Feb 21, 8:10 am, Graham Lea <graham....@belmonttechnology.com.au> > > wrote: > > > > I'm not a tax professional, but I've had a number of experiences > > > preparing or reviewing tax returns that included ESOP options. > > > > What your accountant has said sounds pretty much like what the tax pack > > > says: if you receive options (or shares) at a discount, the discount is > > > considered income in the year of allocation and so becomes taxable. > > > However, it always talks about "the year in which the shares were > > > allocated". In the case of my options, they vest gradually over a number > > > of years, but they were all "allocated" the year I received them. I saw > > > no mention of the term "vesting" in the tax docs. So if all of your > > > shares have been allocated, but just haven't vested yet, you may be able > > > to tax them all in the first year when they were worthless. Talk to a > > > pro, though, and consider calling the ATO to get a definition of > > > "allocated". I know a lot of agents with a query will call the ATO > > > repeatedly until they get someone who gives them the answer they want. > > > > Cheers, > > > > Graham. > > > > -- > > > Graham Lea > > > gra...@grahamlea.com > > > > On 19/02/2012, at 11:21 PM, Michael Overell <michael.over...@gmail.com> > > > wrote: > > > > > Do delayed vesting shares leave founders with personal tax > > > > liabilities? > > > > > I've struggled to get a clear / detailed answer on this question, > > > > despite talking to a bunch of people and searching the SB archives. > > > > Here's hoping a few people in the community can help solve it... > > > > > Situation: > > > > - The founders in a company agree to vest their shares over several > > > > years (eg, as outlined in the Startmate docs > > > > -http://www.startmate.com.au/financing-docs). > > > > - The value of these delayed vesting shares is determined upfront > > > > (effectively zero). > > > > - At each vesting milestone, the appropriate number of new ordinary > > > > shares are issued to each founder. > > > > > Complication: > > > > - Over time, the value of the company increases. Additional preference > > > > shares may be issued at a significantly higher price. > > > > - At each milestone, the delayed vesting shares are now issued at a > > > > price that represents a steep discount to the 'market value'. > > > > > An accountant has raised a concern with this situation. He suggests > > > > that if shares are issued to founders/employees at a discount to > > > > 'market value', there will be a personal tax liability for those > > > > people in the year of issue. That is, the difference between issue > > > > price and market value could be recognised by the ATO as a 'gain', and > > > > taxed as such. > > > > > Question: > > > > Do the founders have a problem here, or is there a way around it? > > > > Does anyone have actual experience or (informal) advice in this > > > > situation? > > > > Note, only interested in Australian tax law (not US). > > > > > Thanks in advance! > > > > > Michael Overell > > > > RecruitLoop > > > > mich...@recruitloop.com > > > >+61 408 791 984begin_of_the_skype_highlighting +61 408 791 > > > >984 begin_of_the_skype_highlighting +61 408 791 984 > > > >http://recruitloop.com.au > > > > > -- > > > > You received this message because you are subscribed to the Silicon > > > > Beach Australia mailing list. > > > > Visthttp://siliconbeachaustralia.orgformore > > > > > Forum rules > > > > 1) No lurkers! It is expected that you introduce yourself. > > > > 2) No jobs postings. 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