Examining the proposed employee share scheme changes

Equity ownership is an important tool for Australian businesses, particularly those in their start-up phase or which are cash-poor. Equity ownership though an employee share scheme (ESS)  or similar is critical for these businesses to attract and retain top talent – talent that will be the defining factor in whether or not a company is able to compete and succeed in a globalised environment.  

In its current form, the existing regulatory treatment is sub-optimal in a number of significant respects and makes it unnecessarily difficult for many smaller firms to offer ESS as part of their remuneration packages.

In late December 2021, the Federal Government released exposure draft legislation and an explanatory memorandum setting out proposed amendments to laws regulating the offering of ESS. The materials follow and build from prior consultations in May and August of 2021 and were promised in the Budget as part of the Government’s JobMaker Plan as part of the Government’s JobMaker Plan.   

With the public stakeholder consultation period having closed, the message from the Government is that they’ve heard the business community. From the helicopter, the proposed changes seek to:

• streamline the process for businesses to offer ESS;
  
  
• support job creation and business development;
  
  
• ensure Australia’s regulatory framework offers competitive remuneration packages; and
  
  
• contribute towards the positive and sustained post-pandemic economic recovery Australia is experiencing.

Overview of corporate changes

A brief overview of the slated changes to the disclosure and licensing requirements announced in the 2021-22 Budget include:

• making the availability of regulatory relief contingent on offers with certain terms, including terms limiting the size of purchases and provision of streamlined disclosure documents;
  
  
• changing the limit on the size of purchases to a monetary cap where an employee can outlay $30,000 per year (which can be accrued for unexercised options over a five‑year period, up to a maximum of $150,000) plus 70% of dividends and 70% of cash bonuses, for an unlisted company ESS offer;
  
  
• removing the limit on the size of purchases where the terms are such that an employee cannot pay for their interests unless there a liquidity event, and the sale or listing price is higher than what the employee will pay;
  
  
• limiting loans to employees who are not existing shareholders;
  
  
• extending regulatory relief in respect of issues to certain discretionary trusts, consistent with existing relief in respect of offers to senior managers;
  
  
• extending regulatory relief in respect of free offers to independent contractors; and
  
  
• including ASIC exemption and modification powers, and regulation making powers.

Overview of tax changes

As part of its 2021 Budget announcement, the Government also announced an important change in tax treatment of ESS interests. The amending Bill was passed by Federal Parliament on 10 February 2022.

Specifically, from 1 July 2022, cessation of employment will be removed as a taxing point in relation to ESS interests. This change applies to existing and future ESS interests that are covered by the ESS rules in Division 83A of the Income Tax Assessment Act 1997 (Cth).  

This relates to most share schemes that provide for acquisition of options by employees at a discount. The change is a welcome one, as it overcomes an acknowledged issue under existing rules which resulted in an unfunded tax liability on vested options or rights in circumstances where the employee ceased employment with the issuing group prior to exercise. From 1 July 2022, such interests generally will not be taxed until the right has been exercised and any pre-existing disposal restrictions on shares have been lifted.

As we approach the final days of the 46th parliament it would be great to think these widely supported and heavily consulted changes could be quickly enacted. These changes do have the capacity to enable employers to offer ESS where the employees do not have to pay or borrow to participate. This is set to have materially reduced compliance requirements and will go a long way in helping businesses attract and retain top talent.