Following years of reviews and Committee recommendations indicating the need to improve the employee share scheme (ESS) provisions, there were some improvements announced in last week’s budget (albeit by no means what is needed).
The two main changes are outlined below. The changes will apply to grants made on or after 1 July 2021 following Royal Assent and will not apply retrospectively.
Providing Increased Shareholder Opportunities
The government recognises the need to reduce red tape and enhance the use of shareholding as a leveraging tool to attract and retain staff. Based on the Budget announcements, the quantum of shares employees can acquire will increase six fold, from $5,000 to $30,000 per year.
This increase in threshold will principally relate to acquisitions made by employees through salary sacrifice or loan share arrangements.
Unfortunately at this stage, the measures are limited to unlisted companies only.
Ceasing Employment – No Tax Trigger
Under the current employee share scheme rules, depending on the plan design and rules an employee may be taxed on an equity interest (e.g. unvested option or performance right) at the time they cease employment.
Sensibly, the Government recognises the flaw in legislative drafting and is now looking to unwind this outcome.
Based on the announcements, employees can retain equity interests when they leave the company and pay the tax at the same time as the other participants (e.g., when the right/option vests and is converted into shares).
The removal of the taxing point at cessation of employment may enable grants of equity to remain fully “on foot” for participants, easing the ESS administrative burden for companies and providing more flexibility in terms of how the interests of departing employees are assessed.
While the changes haven’t addressed a number of the flaws with the ESS legislation, they are a step in the right direction.
What do the changes mean for me?
Employees of Unlisted Companies – Opportunity to acquire 6x number of shares
Employers of Unlisted Companies – Increased potential to promote/provide share ownership for staff
Employer – Less compliance in managing employees who leave and keep equity interests
Director/Executive/Employee Participating in ESS Plan – No tax pain if you leave with untaxed equity interests