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In Australia, an employee share option plan (ESOP) is an employee-owner scheme. An ESOP provides employees with an ownership interest in the company through share ownership. Employees receive this ownership as part of their remuneration package at no upfront cost. In addition, ESOPs allow employees to receive shares or options to shares in the company they work for. In this sense, your employees can enjoy financial benefits when the company performs well. This article explains the different types of ESOP schemes and changes to the law in Australia. If you are considering implementing a scheme, it is essential that you are aware of these changes.

Types of ESOPs

There are different types of employee share ownership plans which will vary depending on:

  • your company’s size;
  • the number of employees in your business; and
  • the purpose of introducing the scheme. 

ESOP schemes can vary depending on whether you have listed your company as a public company or operate a private company.

The most common ESOP scheme is a Fully Paid Non-Voting Share Scheme. This scheme is where company directors own a large percentage of shares but do not want to dilute their ownership. As such, the cost of purchasing a share is spread over several vesting years. This means the shareholder does not have to pay the full price until they reach the cliff date. For example, four-year vesting with a one-year cliff means you will distribute the allocation of shares over four years but issue them annually.

Changes to ESOPs in Australia

Before 2015, your employees had to pay income tax when they received shares or options. This was regardless of whether or not your employees realised any financial benefit from them.

Since 2015, employees are generally not liable to pay up-front tax on those shares or options. Instead, employees only have to pay tax on their shares when they receive a financial benefit from them. This includes when they convert their options to shares.

In March 2022, the Australian government announced further changes which make it easier for businesses to utilise an ESOP. Essentially, these changes allow employees to share directly in the business growth they help generate. These changes include:

  • amending the disclosure rules, such as allowing unlisted companies to offer an unlimited number of shares of an unlimited value to their employees, as long as the employee is not charged more than $30,000 a year for them  and
  • for ESOPs with no participation payment, independent contractors will receive the same treatment and regulatory relief as employees and directors participating in the scheme.

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Tax Changes to ESOPs

If you issue shares to your employees under an ESOP, they can defer tax until they exercise the share option to convert and realise financial benefits. Additionally, 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;
  • 15 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, 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.

Key Takeaways

An employee share option plan (ESOP) is an employee-owner scheme. It provides employees with an ownership interest in the company through stock ownership. Employees are generally not liable to pay up-front tax on those shares or options. Instead, employees only have to pay tax on their shares when they receive a financial benefit from those shares. This includes when they convert their options to shares. Additionally, if you issue shares to your employees under an ESOP, your employees can 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. 

If you need help drafting an ESOP for your startup, our experienced startup lawyers as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions

What is an employee share option plan?

An employee share option plan (ESOP) is an employee-owner scheme that provides employees with an ownership interest in the company through stock ownership.

When do my employees have to pay tax on their shares?

Employees only have to pay tax on their shares when they receive a financial benefit from those shares, including converting the options to shares.

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