- Employee Share Schemes (ESS) align the interests of employers and employees by offering shares or a right to acquire shares about an employee’s employment.
- ESSs allow companies to be more competitive in recruiting and retaining talented employees. They can also result in more productive working relationships, higher productivity and reduced staff turnover.
- There are some small start-up tax concessions available. These allow eligible start-ups to issue options or shares at a small discount and have the tax treatment of that discount deferred until disposal.
Employee Share Schemes
An Employee Share Scheme (ESS) is a scheme where employees are provided with shares, stapled securities or rights to acquire shares (known as ESS interests) about their employment. Such schemes attract talented employees in an international labour market and provide employees with financial interest in their company.
Significant changes were made to the Employee Share Schemes in the 2015 Federal Budget. These changes are planned to come into effect 1 July 2015. ESSs are regulated by the Income Tax Assessment Act 1977.
Employee share schemes offer employees a direct financial interest in the company they work for. These schemes encourage positive working relationships and reduce staff turnover. For employers, ESS attract and retain talented employees. They increase international competitiveness by supplementing employees’ salaries with equity in the company they work for.
- There are some taxation concessions available to employees of certain small start-up companies. Shares must be held by the employee for at least three years. Discounts on shares will not be subject to income tax, and discounts on rights will be treated as capital and deferred until the sale of the resulting share.
- To access small start-up concessions, start-ups must be incorporated for less than 10 years at the end of the most recent income year, must not be listed, have less than $50 million for the income year and the employing company must be an Australian resident taxpayer.
- The new legislation will allow the Federal Commissioner of Tax to approve market valuation methodologies that can be used by taxpayers to comply more easily with the law.
Impact on Startups and Small Businesses
Employees issued with options under ESSs will be able to defer tax until they exercise the share option to convert and realise financial benefits. Employees have up to 15 years to defer their tax liability. The taxing point will take place at the earliest of one of the following times:
- When the employee ceases the employment in respect of which they acquired the right;
- Fifteen years after the employee acquired the right;
- When there are no longer any genuine restrictions on the disposal of the right, and there is no real risk of the employee forfeiting the right; or
- When the right is exercised, and there is no real risk of the employee forfeiting the resulting share and there is no genuine restriction on the disposal of the resulting share.
Concessions for Employees
Employees under ESSs can access an ESS tax concession so long as their maximum individual ownership is under 10%. Other concessions include allowing employees to receive options or shares at a small discount. To qualify for these concessions, startups must have been incorporated by less than ten years, be unlisted and have a turnover of no more than $50 million per year. Employees can have access to concessions only if they earn less than $180,000 a year. The upfront tax concession is limited to $1,000.
Capital Gains Tax
Employees of ESSs can access a 50 per cent Capital Gains Tax (CGT) discount, even where the underlying shares are held for less than 12 months.
Maximum Ownership and Voting Right Limitations
To access taxation concessions, employees must not hold more than 10% of a company. This encourages employees with small or no ownership in a company to take up an interest. This also prevents employees from misapplying the concession to buy a business or indirectly access company profits through ESS rules.
Frequently Asked Questions about Employee Share Schemes
Q: What happens in situations where the employee has already been taxed on a discount but the interest is forfeited (e.g. the employee has left the company)?
A: Employees will be able to receive a refund of income tax paid about discounted ESS interests. The forfeited ESS interest is treated as having never been acquired.
Q: What is the small start-up concession?
A: The start-up concession provides that an employee does not include the grant of an ESS interest in their assessable income if the scheme meets certain conditions.
About shares, the discount is not subject to income tax and the share, once acquired, is then subject to the CGT system with a cost base reset at market value.
In relation to rights, the discount is not subject to upfront taxation and the right is then subject to CGT with a cost base equal to the employee’s cost of acquiring the right.
Q: Will there by CGT for the small start-up concession?
A: There will be no capital gains tax on the exercise of rights and the resulting acquisition of shares or options. However, upon exercise, the exercise price of the rights will form part of the cost base for the resulting CGT tax calculation.
Q: Does the start-up concession apply with other ESS taxation rules?
A: Those eligible for the small start-up concession cannot access either the $1,000 up-front concession or the deferred taxation concession.
How can LegalVision help me?
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