More Incentive to Implement Employee Share Schemes?
Employee Share Schemes (ESS) have long been utilised as an invaluable tool to encourage and motivate key personnel to invest themselves in the future of the company.
Employee Share Schemes are also particularly appealing to boot strapped start ups who may not have the capital or cash flow to attract and retain employees.
For the employees, participation in Share Schemes can offer an opportunity to carve out a better package that includes a potential share in profits. ESS can help employees build wealth and provide them with some fairly attractive tax concessions.
Under the existing regime for share schemes, however, employees are required to comply with some fairly onerous disclosure obligations. These requirements can be particularly burdensome for smaller start-up companies that do not have the resources to produce appropriate Disclosure documents.
Additionally, these disclosure documents are made publicly available resulting in start-up companies having to release potentially sensitive commercial and financial information.
As part of the recent Innovation Report, these obligations were identified as one of the key causes for low utilisation rates of ESS.
Upcoming Amendments
In response, in October 2016, the government committed to making several legislative amendments to the disclosure obligations, which seek to limit the disclosure requirement and allow an exemption to the requirement to publicly release commercially sensitive documents for start-ups. This is laid out in the Treasury Laws Amendment Bill 2016, where amendments are made to the Corporations Act 2001. Another consideration will be to make the ESS more user-friendly.
These amendments will complement and support the introduction of generous tax concessions, which commenced in July 2015, for employees taking advantage of an ESS. These concessions include deferring tax obligations on share options until a true benefit is realised. Eligible start-ups will also be able to offer shares to employees at a discount and have that discount exempt from tax.
A company will be considered an eligible start-up for the purposes of the Employee Share Scheme if it (or its subsidiaries or holding company) was not listed on the stock exchange if it has been incorporated for less than ten years, and its turnover does not exceed $50 million.
Employee Share Schemes are an invaluable tool to offer equity to incentivize existing employees and attract new talent. A well-structured Scheme can help a company both attract new talent and also reward long-term, loyal employees. It also encourages employees to think about and share in the company’s future success.
See below for a complete transcript of this episode -
Hello, welcome to You Legal TV.
Employee Share Schemes are an invaluable tool to offer equity to incentivize existing employees and attract new talent. A well-structured Scheme can help a company both attract new talent and also reward long-term, loyal employees. It also encourages employees to think about and share in the company’s future success.
The Government changed the way these Schemes are taxed in 2015. 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.
However, there are benefits and drawbacks for companies who want to implement a Scheme, and there are also tax and reporting considerations.
What Should I Do Next?
Contact us if you would like further legal advice on Employee Share Schemes (ESS). 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.