In the March 2022 Federal Budget, the Government flagged changes to the Employee Share Scheme (ESS) rules to expand access to schemes so that employees at all levels can directly share in the growth of the business.
We first introduced you to Employee Share Schemes (or ESS) in our October 2021 mi-fi mail but for the uninitiated, in broad terms, an ESS is a scheme under which shares in a company, or rights to acquire shares in a company (‘Interests’), are issued to an employee or their associate in respect of their employment.
At a commercial level, ESS arrangements are often used to better align the interests of employers and employees, as employees are provided with an opportunity to share in the profitability and growth of the business. The arrangements can also be useful in situations where a business is in start-up mode and does not have significant cash flow or reserves to attract top-quality employees with high salaries.
Currently, there are restrictive limits to the value of the Interests that can be issued to employees without a company meeting sometimes onerous disclosure obligations under the Corporations Act.
Under the proposed changes in the Budget, where employers make larger offers in connection with employee share schemes in unlisted companies, participants can invest up to:
• $30,000 per participant per year, accruable for unexercised options for up to 5 years, plus 70 per cent of dividends and cash bonuses; or
• Any amount, if it would allow them to immediately take advantage of a planned sale or listing of the company to sell their purchased interests at a profit.
The Government will also remove regulatory requirements for offers to independent contractors, where they do not have to pay for Interests.
While these changes might expand access to employee share schemes, it is important to consider the tax implications that can arise for employees when they receive shares or options at a discount to their market value. There are several different ways that employees can be taxed in this area and the treatment will often depend on how the ESS arrangement has been structured by the company.
Upcoming Event
Introduction to Employee Share Schemes. The how, the what and the why.
If you would like to find out more about employee share schemes and how they could benefit your company, we welcome you to attend our upcoming event on Thursday 28th July 2022.
We’ll cover the following:
• What an ESS is;
• Companies that will benefit most from an ESS;
• The commercial considerations when designing the ESS;
• The different types of ESS under tax laws; and
• The obligations of the company under the Corporations Act, including the proposed changes noted above.
You will leave with a good overview of the merits and process of implementing an ESS.