What Are the Reporting and Disclosure Requirements for ESOPs?

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Table of Contents

• How ESOPs Work
• Disclosure
• Disclosure Exemptions
• Disclosure Documents
• Maintaining a Register
• Reporting
• Key Takeaways

As an early-stage business owner, you will likely find it challenging to attract and retain the key talent essential to your business’ success. Many startups use an employee share option plan (ESOP) to attract and retain talent. An ESOP offers employees an ownership interest in your business. This article will explore how ESOPs work and ASIC’s reporting and disclosure requirements for ESOPs.

How ESOPs Work

An ESOP is a useful mechanism to issue your key employees with an ownership interest in your business. Using an ESOP, your employees can purchase options and then convert these into shares at a future date. Subject to certain requirements, employees can enjoy beneficial tax treatment through the “startup tax concessions” if your company and the ESOP plan meet certain requirements.

The base document for your ESOP is your Plan Rules. Your Plan Rules establish the structure of your ESOP and will dictate the key rights and obligations for all parties, such as:

• employee eligibility; 
• vesting conditions; 
• at what point in time, or at the occurrence of what event, options can be exercised into shares; and
• what will happen in the event an employee leaves the company.

Once your Plan Rules are in place, you will make individual offers to your employees to participate in your ESOP by using an ESOP offer letter.  

Disclosure

The Corporations Act 2001 (‘Corporations Act’) outlines some important rules about capital raising with third parties. If you make an offer to third parties to purchase shares or options, you must include a disclosure document. Here, an option is the right to purchase shares at a set price within a certain time. This will always be the case unless an exemption applies. A disclosure document provides potential investors with certain information that will assist them in making an informed decision to invest. 

Disclosure Exemptions

As drafting disclosure documents are costly and time-intensive, early-stage companies will often try to avoid issuing them by utilising an exemption. The table below sets out the main types of exemptions you may fall under.  

Disclosure Documents

If your offer of securities does not fall under an exemption, you will be required to make certain disclosures when offering shares or options.

The offer information statement is generally the simpler of the formal disclosure documents.

Maintaining a Register

You are required under the Corporations Act to maintain a register that records all the options you have issued in your company. You are also required to keep with your register all documents that grant options in your company (such as your ESOP Offer Letters). Once an employee exercises their ESOP options, you will need to reflect this in your options register and make a new entry in your company’s share register. You will then have 28 days from the date that the shares have been issued to notify ASIC.

Reporting

If you provide your employees or their associates with employee share/option scheme interests under an employee share/option scheme (ESS), you have certain reporting obligations to the Australian Taxation Office (ATO).

An ESS interest is essentially a share or an option given to the employee under an ESS. You must provide the ATO (and your employee) with details of your employee’s ESS interests. 

Reporting to your employee

There are two situations where you must give your employee an ESS statement.

Firstly, you must provide an ESS statement if they have acquired ESS interests under a tax-deferred ESS, and the deferred (later) taxing point happened or could have happened in the financial year. This rule also applies to a cessation (ending) time for shares and rights acquired before 1 July 2009. The latest possible deferred taxing point for both types of interests was 30 June 2019. This means there will be no income reportable on these interests in the 2019–20 income year and onwards.

Furthermore, you must provide a statement if a start-up concession acquisition event occurred. In particular, you must notify your employee about ESS interests acquired during the income year, including the: 

• number of ESS interests acquired;
• market value of ESS interests acquired;
• acquisition price of ESS interests that are shares;
• exercise price of ESS interests that are rights; and
• acquisition date of the ESS interests.

This same information must also be provided to your employee if they are eligible for the ESS start-up concession. They will need this information to determine the cost base of their capital gains tax (CGT) calculation when determining any gain or loss upon disposal of their ESS interests. 

Crucially, the deadline for providing the ESS statement to your employee(s) is 14 July after the end of the financial year. The statement will help your employee complete their tax return.

Where you are required to provide an ESS statement to your employee(s), there are penalties payable if you fail to do so.

Reporting to the ATO

ESS reports are due to the ATO by 14 August each year.

The ESS annual report you provide to the ATO must include, but is not limited to, ESOP employee information such as the: 

• date the ESS interests were acquired;
• date a taxing point happens to an ESS interest, or the deferred taxing point for a tax-deferred scheme; 
• number of ESS interests acquired; 
• market value of the interests;
• acquisition price of ESS interests that are shares;
• exercise price of ESS interests that are rights;
• number of ESS interests for which a deferred taxing point arose during the financial year;

You should note that your accountant is likely to have the necessary expertise to assist with preparing and lodging ESS statements with your employees and the ATO. It is vital that you keep your obligations here in mind when completing your company’s end-of-year financial returns. This is because there may be penalties applicable if you fail to provide the ESS statements to the relevant parties. 

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Key Takeaways

Being in the early stages of a startup can be an exciting opportunity, but you may also face some significant costs. When implementing your ESOP and making offers to your key talent, you may need to make costly and timely disclosures. As a result, it is important that you understand how ESOPs work and in what cases you must report relevant information to either your employees or the ATO. Ensure also that you consider disclosure exemptions and if they apply, to avoid spending significant time and money. 

If you have further questions about ESOP disclosure and reporting requirements, our experienced startup lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.