Update: Legislation passes on the removal of tax on the cessation of employment

The Legislative Bill that contained the change to remove tax on cessation of employment has passed both Houses of Parliament. As a result, from 1 July 2022, cessation of employment will no longer be a taxing point under the Employee Share Scheme tax rules.

This means that employees who cease employment on or after 1 July 2022 and who retain their unvested equity (“good leavers”), will no longer be subject to tax on the value of their equity on termination of employment.

This will remove the significant cash flow burden that tax on cessation of employment imposed on many good leavers. Previously, the tax was payable by the employee and often, they did not have access to the shares to fund the tax. The value being taxed for these former employees should typically align to the time the award vests or is exercised and the individual has access to the shares.

What this means for your organisation

• This is a welcomed tax change for employees that cease employment and retain their equity awards. This typically includes employees that cease employment due to redundancy, death, disability and retirement. Although the tax charge was never the employers responsibility, the removal of tax on cessation of employment will also remove the need for employers to assist these employees to navigate the implications of tax arising on cessation of employment.

• Employee tax guides and other plan documents that refer to tax on cessation of employment will need to be updated.

• Many organisations changed the structure of their employee awards to address the implications of tax on cessation of employment, particularly by using awards that are considered "Indeterminate Rights" for tax purposes. Although the use of Indeterminate Rights was a valid means to alleviate cash flow complexities associated with tax on termination, the use of Indeterminate Rights also generated a host of administrative complexities relating to the way the equity needed to be reported. The removal of tax on cessation of employment provides organisations with an opportunity to review their existing arrangements and consider the use of other instruments that may be simpler to communicate and administratively less burdensome.

• Processes and procedures that are currently used for tax on cessation of employment can be removed. This includes processes for reporting and calculation of taxes on cessation of employment.

If you have any questions about this new legislation please contact one of your PwC Reward Advisory specialists.