In Short:
-
Share schemes allow companies to offer equity to employees as an incentive.
-
Compliance requirements include disclosure documents and tax considerations.
-
Start-up companies can access specific tax concessions for employee share schemes.
Tips for Businesses:
Before implementing a share scheme, ensure you understand the disclosure and tax obligations under the Corporations Act and Income Tax Assessment Act. Seek legal and tax advice to determine if your company qualifies for any exemptions or tax concessions, especially for start-ups. Stay on top of annual reporting deadlines to avoid penalties.
Table of Contents
- What is a Share Scheme?
- What are the Laws and Compliance Requirements that Govern Share Schemes in Australia?
- ESS Disclosure Exemption
- 2. Income Tax Assessment Act 1997
- 3. Concessions For Start-up Companies
- 4. Annual Reporting
- An Alternative to a Share Scheme
- Key Takeaways
- Frequently Asked Questions
Share schemes are a way for companies to provide equity to employees and stakeholders by issuing shares to them. They are commonly referred to as Employee Share Schemes (ESS) in Australia. There may be tax compliance and special tax treatment considerations if the shares are granted at a discounted rate. There are also tax concessions that may apply to start-up companies. This article outlines what a share scheme is, how it applies and how it works for specific individuals.
Before buying a business, it is important to undertake due diligence, to verify the information supplied by the seller. This guide will walk you through the due diligence process.
What is a Share Scheme?
A share scheme is a way that companies can incentivise employees and other stakeholders to reach certain performance milestones or stay with the company for a longer period of time by issuing them shares in the company
Share schemes enable companies with limited financial resources to offer shares as a means of attracting and retaining employees, thereby fostering long-term commitment and contribution to the company. It allows companies to offer employees ownership in the company to incentivise their employment if they are not able to offer market value salaries.
Share schemes are subject to laws and regulations that govern their operation and implementation, which you must comply with.
What are the Laws and Compliance Requirements that Govern Share Schemes in Australia?
1. Disclosure Requirements, Disclosure Documents and Disclosure Exemptions
Disclosure Requirements
The Corporations Act contains disclosure requirements that require you to provide the recipient of equity in the company with a disclosure document unless there is an applicable exemption to the disclosure requirements.
Disclosure Exemptions
Applicable exemptions may be full or partial exemptions to the disclosure requirements.
The full disclosure exemptions that apply to offers made under share schemes may include:
- offers to senior managers in the Company, such as executives; and
- small-scale offerings, which are offers of up to 20 people and the offers do not exceed $2 million in total over a 12-month period.
ESS Disclosure Exemption
If the offers under the share scheme you are offering are covered by one of these exemptions, you may be able to offer the shares without providing disclosure documents.
Additionally, the company may be eligible to access the partial ESS disclosure exemption. This is designed to reduce the regulatory burden on companies offering employee share schemes, making it easier and less costly to implement these schemes. This exemption offers reduced disclosure requirements compared to a full prospectus, simplified documentation process and lower compliance costs for companies. To be eligible for this, the company must meet conditions. This includes the following:
- The offer must be made only to eligible employees or their associates;
- There must be restrictions on the transfer of ESS interests for unlisted companies; and
- The offer must not exceed certain monetary limits:
- For listed companies: $5,000 per employee per year (based on the market value of shares); or
- For unlisted companies: $5,000 per employee per year (based on the issue price of shares).
Companies using this exemption must still provide a disclosure document to employees, but it’s less detailed than a full prospectus. This document typically includes:
- Information about the company and its financial position
- Details of the ESS offer
- Risks associated with participating in the scheme
We recommend seeking legal advice before issuing shares to employees or advisors to ensure compliance with applicable disclosure requirements.
Disclosure Documents
If the offers under the share scheme do not fall under a full disclosure exemption, you may need to provide employees with a disclosure document. Disclosure documents can take various forms and can be quite complex. The type of disclosure and the specific disclosure document required will depend on several factors, including whether a partial exemption applies, the type of securities being offered, and the individuals to whom the securities are being offered. Given the complexity, if you think you might need to prepare a disclosure document, we recommend seeking legal advice before issuing any securities.
2. Income Tax Assessment Act 1997
You should consider the tax implications for your employees when they receive shares under a share scheme. Tax concessions may apply to share schemes if you and your employee have followed special tax rules.
We recommend seeking advice from a tax advisor or tax lawyer to understand the tax implications of a share scheme and whether any tax concessions may apply to limit the tax liability of your employees participating in the scheme. If the tax implications of a simple share scheme are too great, your tax advisor or tax lawyer may be able to recommend an alternative incentive scheme that results in a better outcome for your employees.
3. Concessions For Start-up Companies
Employees who receive shares in an early-stage start-up company under a share scheme can access specific tax concessions, provided they meet the eligibility criteria. Specifically for the start-up concession, the following must occur:
- the startup company must not be listed on any stock exchange, the company has to be incorporated for less than 10 years, and the aggregated annual turnover must not exceed $50 million;
- the employer company must be an Australian resident company;
- the employees must hold the shares subject to the scheme for at least three years;
- a share must be provided at a price which is a discount of no greater than 15% of the market value. This will generally require a valuation of the company to be performed by an accountant, or you can use the ‘safe-harbour’ valuation method;
- for shares offered under a share scheme, the company must also offer shares to at least 75% of its Australian permanent employees who have worked at the company for 3 years or more; and
- a single employee cannot own greater than 10% of the company’s shares, or they will not be eligible for the startup tax concessions.
If the offers you are making under the share scheme meet the above requirements, you will likely be able to provide offers that attract the start-up tax concessions. The main attraction for qualifying for these tax concessions is that your employee will not incur tax liability on the shares on receipt of the shares. However, if you do not meet these criteria, you will not be able to offer shares under the start-up tax concessions. Other concessions may still apply. We recommend seeking advice from a tax advisor to confirm your eligibility to rely on the tax concessions.
4. Annual Reporting
You must provide your employees with annual ESS statements by 14 July at the end of each financial year. Additionally, you must also lodge the ESS statement electronically with the Australian Taxation Office by 14 August each year.
An Alternative to a Share Scheme
If you have considered the above points and have decided that this is not the correct scheme for your company, there is another scheme known as an Employee Share Option Plan (ESOP). An ESOP will enable you to offer employees the option to convert their compensation into shares at a later date. This may be appropriate if you are looking to offer employees incentives within your company, but you are not willing to relinquish ownership of the company. You can limit when employees can exercise their options to either when the options have vested or at an exit event.
Key Takeaways
When considering implementing a share scheme in your company to incentivise employees and other stakeholders in your company, you should consider the following compliance and regulatory requirements:
- the requirements for offering shares under the Corporations Act;
- the disclosure requirements, disclosure documents and disclosure exemptions that may apply;
- the obligations under the Income Tax Assessment Act 1997;
- concessions for start-up companies; and
- the annual reporting requirements.
If you have any questions about share schemes, our experienced business structuring 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.
Frequently Asked Questions
What is a Share Scheme?
A Share Scheme is a program where companies offer employees and stakeholders shares in the company as an incentive to meet performance targets or to retain them for a longer period.
What are the disclosure requirements for a Share Scheme in Australia?
Under the Corporations Act, you must provide employees with a disclosure document when offering shares, unless a disclosure exemption applies. These exemptions include offers to senior managers or small-scale offerings. For Employee Share Schemes (ESS), there are also partial exemptions that reduce the disclosure burden for companies.
We appreciate your feedback – your submission has been successfully received.
