Money
Issue No. 5 - April/June 2002
Taxing Times
Tax matters - keeping you up to date
by John Rawson
Tax bill a double blow for redundant employee stock option holders
Employees holding stock options in their company could face an unwelcome tax bill if they are made redundant. On termination of employment, an employee is often subject to tax on stock options acquired under an employee stock option plan.
While in many cases an employee made redundant will be able to retain stock options, it was likely that the original restrictions will remain on exercising the options. This means that employees made redundant will have a tax liability on termination, but will be unable to realise cash from the sale of shares
At a time when redundant employees most need the cash to pay a tax bill, they may not be able to access the stock. The only time they won’t have a tax bill is if they had previously elected to be taxed at the date of grant of the options
The problems associated with redundancy provisions undermined the effectiveness and spirit of employee stock plans, which were designed to encourage staff retention and stimulate employee investment in their company.
The issue of tax liability and redundancy could be addressed by rescheduling the date of payment of tax. The Federal Government can simply tie the payment of tax to the point in time when the employee is able to realise the gain – when the restrictions ease on exercising the options
In the present situation, many employees who loyally undertake to acquire options in their company seem to be unaware of the potential tax liability if they are made redundant.
See the following example of the cash flow problems faced by employee stock option holders who were made redundant:
Example: Employee stock options and redundancy
March 2002
Stock option granted with exercise price of $10; stock option cannot be exercised until March 2004 and employee does not elect tax at grant.
March 2003
Employee made redundant, can keep stock options but ca...
