The Federal Government has recently released proposed changes to the tax treatment of Employee Share Schemes (“ESS”) to make it easier for companies to set up an ESS. While some of the changes are aimed to assist start-up companies, other changes apply to all companies and will have a broader impact on how employers use an ESS as an incentive.
What is an Employee Share Scheme?
An ESS is a scheme where shares or rights in a company are provided to an employee in relation to their employment. Put simply, an ESS gives employees a financial share of the company’s potential success and therefore, provides a financial incentive for employees in the development and success of a company.
Often companies will encourage employees to participate in an ESS by offering shares, stapled securities or rights to acquire shares (including options) in the company (“ESS interests”) to the employee at a discounted price. This is where the tax rules kick in. Where an employee acquires an ESS interest at a discount under an ESS, that discount will be taxed.
Key changes specific to start-up companies
The below tax concessions will apply to certain start-up companies. To be eligible, the company must be unlisted, have an aggregate turnover of $50 million or less, and be incorporated for less than 10 years.
- Shares offered under an ESS will not be taxed where the discount is less than 15% of the market value and the share is held by the employee for at least 3 years.
- Tax can be deferred on rights issued under an ESS until the sale of option or underlying share, where the exercise price is at least the market value of an ordinary share.
Other key changes
Tax can be deferred on rights and options where there is no “real risk of forfeiture”.
Shares, rights and options subject to deferred taxation (including the concessions offered to start-up companies) will be taxed at the earliest of:
- when there is no real risk of forfeiture of the share or right and any sale restrictions is lifted;
- when the employee ceases employment;
- 15 years (extended from 7 years) after acquiring the share or right; or
- (specifically for options) when the employee exercises the option (i.e. converted to shares)
- A tax refund will be available where a right or option lapses, so long as the ESS has not been setup in a way that protects the employee from market risk.
These changes are intended to apply from 1 July 2015, but the legislation may be altered after the Government’s consultation with industry and its passage through the Senate. In the meantime, HHG Legal Group will provide rolling updates of important developments and will be pleased to advise you about setting up an ESS.
If you would like further information in relation to this matter or other legal matters please contact our office on Freecall 1800 609 945 or email us now.