Should I implement an Employee Share Scheme?

Employee Share Schemes are an invaluable tool to offer equity in a company to incentivise existing employees and attract new talent. A well-structured Employee Share Scheme can help companies not only attract new talent but also reward long-term, loyal employees and encourage employees to think about and share in the company’s future success. An Employee Share Scheme grants an employee a beneficial interest in a right to acquire shares in a company. It is an arrangement under which shares or options in a company are provided to an employee with respect to their employment. Employees may purchase shares, or shares may be provided to an employee under certain terms and conditions. Employee Share Schemes may also be used as a method for a company to allocate earnings dividends to employees to share profits without increasing payroll. The Australian Government changed the way Employee Share Schemes are taxed in its 2015 Employee Share Schemes law. Among the changes were improvements to rights-based deferred tax schemes and refund provisions, an increase in the tax deferral period from 7 years to 15 years, and tax concessions for eligible startups. Rights-based schemes, such as options, are now eligible to have deferred taxation until exercise though there is no change to the taxing point for shares, except in the case of eligible startup companies. The maximum deferral period for schemes eligible for tax deferral will change from 7 years to 15 years. Further, tax deferral is now available for employees who have less than 10% ownership and voting rights in a company, where previously the number was 5%. There is no change to the taxing point when an employee ends employment, which continues to be a problem for employees that hold unvested equity following the end of their employment. Eligible startups have also benefited from the changes in ESS laws. Eligible startups are defined as companies that have been incorporated for less than ten years are unlisted, and have a yearly revenue of less than $50 million. If a startup meets these qualifications and offers its ESS to at least 75% of its permanent employees, then the startup can benefit from a number of tax concessions, which include discounts of up to 15% on shares to be permanently sheltered from tax and deferred taxation on options granted with an exercise power greater than or equal to the market. The new laws also limited the disclosure requirements for companies with Employee Share Schemes. Previously, implementing Employee Share Schemes meant disclosing sensitive financial and commercial information that would be publicly available, potentially disclosing this information to competitors. Now, the disclosure obligations have been limited, and the new laws also allow an exemption to the requirement of publicly releasing potentially sensitive information. The Australian Taxation Office has also changed the reporting requirements of Employee Share Schemes. The ESS rules require employers to provide the ATO with details of employees’ ESS interests. However, the ATO will no longer accept paper or Bulk Load Excel Spreadsheet lodgements. Employers will only be able to lodge Employee Share Scheme reports using an ESS online form for employers with up to 20 ESS participants or software that meets the ATO’s ESS electronic reporting specifications for employers with more than 20 ESS participants. Other changes include how an employer reports discount amounts and tax withholding and how internationally mobile employees report their ESS income that is subject to Australian income tax. There are many benefits and drawbacks for companies who want to implement an Employee Share Scheme. There are also numerous tax and onerous reporting considerations. It is important to carefully consider how to construct an Employee Share Scheme that best fits your company and how to fulfil the ESS reporting requirements.

Contact us if you would like further advice on Employee Share Scheme arrangements and the application of the ESS laws to your company. Our Lawyers at You Legal will be happy to assist you in whatever way we can. This blog is for general guidance only. Legal advice should be sought before taking action in relation to any specific issues. As a leader in your company, do you wonder what duties are imposed on you and by whom? Find out by reading the first few chapters of 'How to Avoid a Fall from Grace: Legal Lessons for Directors'. 

Download Our eBook"How to Avoid a Fall from Grace: Legal Lessons for Directors."