Australian start-up and unlisted companies move closer to the big leagues with new rules for employee share plans imminent

2022 Budget Employee Share Scheme Changes

by admin

Australian start-up and unlisted companies move closer to the big leagues with new rules for employee share plans imminent

2022 Budget Employee Share Scheme Changes

by admin

by admin

While we have long promoted the benefits of employee share schemes (ESS) as an important reward tool, Australia’s ESS regulation for non-ASX listed companies has remained, in a word, lacking. Steps have been taken over recent years to contemporise the legislation and bring it more in line with global competitive markets. Yet, the onerous rules continue to create barricades for smaller companies and start-ups from getting a foot in the employee share ownership door.

The 2021 Budget had announced two major changes which kicked in for the 2021/22 financial year (Read about them in our blog Tweaks To Employee Share Rules To Provide Leverage And Flexibility). While it was a positive movement, overall the reforms were partially implemented and there was still some room left for impactful change.

Encouragingly though, Tuesday’s Budget release formalised this new set of ESS reforms ensuring the changes will be enacted. This is positive news and much needed certainty for some sectors. To reference the actual Budget detail, refer to Budget Paper No. 2 page 19 (i.e. digital PDF page 33).

What are the employee share scheme changes?

While the Budget papers were very light on with detail, the three areas of reform relate to:

  1. Increasing the value of shares unlisted employers can provide to employees – from $5,000 to $30,000 per year
  2. Removing any share cap for employees to take advantage of a planned sale or listing
  3. Reducing regulatory requirements for grants of equity to contractors

*Note there were announcements made regarding the removal of the ESS taxing point when an employee ceases employment. This change was announced in last year’s Budget and has been legislated with effect from 1 July 2022.

How will the changes impact employee share ownership in Australia?

The challenge for unlisted companies up until now has been that for employees below manager level, the value of shares which can be offered has been limited to $5,000 per year. This cap has limited the effectiveness of young and emerging companies in attracting and retaining industry talent. They typically aren’t able to offer the same salaries as larger or listed companies and thus, lose out securing much needed skills of the ‘best and brightest’ during the critical growth stage.

The change in cap for employee shareholding from $5,000 to $30,000 per year may provide the necessary leverage for companies to now consider the establishment of an employee share ownership plan.  Check out our blog for design ideas  “8 Steps To Employee Share Schemes In Private Companies”.

What Will It Mean To Employees?

Here’s an example. If a company currently pays an employee $70,000 pa, going forward it can supplement this cash salary with equity to the maximum value of $30,000 to provide a total remuneration package of $100,000. The grant of equity effectively increases the total remuneration by 43% and also provides the potential benefit from the growth in equity in the future. See Figure 1. below.

Fig 1.

 

Still some work to do for the government

While the Budget announcements should boost Australia’s competitiveness on employee share ownership internationally, there are a number of further changes needed. As an example, the recommendation from September last year to increase the tax exempt plan limit from $1,000 to $5,000 (see our blog summary in Proposed New ESS Rules Could Level The Playing Field). Also, the relaxing of rules regarding employee share trusts would provide opportunities for listed entities also seeking to promote share ownership.

What companies should be doing now to take advantage of the changes

Given the lifting of the share grant cap, unlisted companies can now consider an employee share ownership program as a viable part of their overall remuneration and reward strategy. This couldn’t come at a better time considering the current staffing challenges that many Australian industries are facing.

While the Budget reforms are targeted at unlisted companies, the benefits of employee share plans aren’t limited to start-ups alone. To help combat the great wave of attrition currently hitting Australia, companies can use share offerings as a viable way to ‘sweeten the pot’ within the current recruitment landscape.

Years of closed borders restricting the free movement of global talent has created a national recruitment nightmare and choked off the start-up ambitions of would-be companies. An employee equity grant offering could be just the tool to reinvigorate your workforce and ensure your top talent sticks around.

Contact us for more information on how to implement an employee share plan at your company.

Related posts

The Great Resignation – Time To Review Your Reward Strategy

8 Steps to Employee Share Schemes In Private Companies

Tweaks To Employee Share Rules To Provide Leverage And Flexibility

 

 

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