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In Australia, an employee stock ownership plan (ESOP) or employee share scheme (ESS) is an employee-owner scheme that provides employees with an ownership interest in the company through stock ownership. Employees receive this ownership at no upfront cost and it is part of their remuneration package. ESOPs allow employees to receive shares or options to shares in the company they work for, so they receive financial benefits when the company performs well.

This article explains the schemes and recent reforms. If you are considering implementing a scheme, it is important to be aware of these changes.

Types of ESOPs

There are different types of employee share ownership plans; these all vary on the size of the company, the number of employees and the purpose of introducing the scheme. Schemes can also vary depending on whether the company is publicly listed or a proprietary and private company.

Common schemes include a Fully Paid Non-Voting Share Scheme. This scheme is where the directors and controllers of the company own a large percentage of shares and do not wish to dilute their power when shares are offered. These schemes are common where the cost of purchasing a share is spread over a number of vesting years and the full price does not have to be paid until certain cliff dates are reached. For example, four year vesting with a one year cliff, meaning the allocation of shares will be distributed over four years, with shares being issued on an annual basis.

Reforms to ESOPs in Australia

Australian employee share option plans changed in 2015 when a number of reforms were made. Prior to 2015, start-up employees who were issued shares or options were required to pay income tax at the time they receive those shares or options. This was regardless of whether or not the employees realised any financial benefit from them.

Since 2015, employees are generally not liable to pay up-front tax on those shares or options. Employees only have to pay tax on their shares when they receive a financial benefit from those shares (including converting the options to shares). There are a number of requirements a company must fit in order to receive the tax and concession benefits, including ensuring a company is correctly structured and legal documents are properly drafted.

In March 2022, the Australian government announced further reforms, making it easier for businesses to utilise an ESS and reducing red tape. The reforms allow employees to share directly in the business growth they helped generate. These changes include:

  • amending the disclosure rules, allowing unlisted companies to offer an unlimited number of shares, of an unlimited value, as long as the employee is not charged more than $30,000 a year for them (up from a $5,000 a year cap). Employees will also be able to accrue up to $150,000 over a five year period; and

  • for employee share schemes where there is no payment to participate, independent contractors will receive the same treatment and receive the same regulatory relief as employees and directors who are participants in the scheme.

Tax Changes to ESOPs

Employees issued with options under ESSs 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. 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.

Key Takeaways

LegalVision can assist you with drafting documents for your employee share scheme or employee share ownership plan 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.


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