Summary
- Employee share schemes (ESS) allow Australian businesses to offer equity to employees, but must comply with disclosure, tax and reporting requirements.
- Eligibility for tax concessions, including start-up concessions, depends on meeting strict criteria under the Corporations Act and Income Tax Assessment Act 1997.
- This article explains employee share scheme compliance requirements for Australian businesses, including disclosure, tax and reporting obligations.
- It is prepared by LegalVision’s business lawyers, which specialises in advising clients on employee share schemes and corporate compliance.
Tips for Businesses
Review whether your ESS qualifies for disclosure exemptions before issuing shares. Assess tax implications early, including eligibility for start-up concessions. Ensure valuations are accurate and conditions are met. Keep records and meet annual reporting deadlines. Consider whether an option plan may better align with your ownership and incentive objectives.
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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.
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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.
What are the Laws and Compliance Requirements that Govern Share Schemes in Australia?
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.
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 a number of forms, and can be quite complex. The type of disclosure and the specific disclosure document required will depend on a number of factors including whether a partial exemption applies, the type of securities being offered, and the people who are receiving the securities.
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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 is less detailed than a full prospectus. This document typically includes:
- information about the company and its financial position;
- details of the ESS offer; and
- risks associated with participating in the scheme.
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.
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.
Seek tax advice to understand the implications of a share scheme and any available concessions. If tax outcomes are unfavourable, an alternative incentive structure may be more suitable.
Concessions for Startup 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 your share scheme meets the eligibility requirements, employees can access start-up tax concessions and generally will not be taxed on receipt of the shares. If not, these concessions will not apply, though other tax concessions may still be available. We recommend seeking tax advice to confirm eligibility.
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 suit businesses wanting to incentivise employees without giving up ownership. Options can be exercised on vesting or at an exit event.
Key Takeaways
When implementing a share scheme, consider the key compliance and regulatory requirements that apply:
- 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.
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Frequently Asked Questions
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.
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.
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