Welcome to the first in our Employee Share Option Plan (‘ESOP’) series of blog articles. New legislation came into effect on 1 July 2015 that now makes the provision of an Employee Share Option Plan attractive to both startup company’s and employees alike. Whilst the new laws make it easier and lest costly for startups to implement an ESOP, the mechanics of setting up a functional and compliant ESOP is a relatively new area for startups and their advisors. Our view is that this promotion of easy and cost effective has led many startups and their advisors to underestimate the attention to detail that is still required when setting up an ESOP. Unfortunately, this can have costly consequences.
Since the Startup Concession was introduced our team have developed a comprehensive guide, work program and associated tools that support a compliant and effective ESOP. A large part of our approach is in educating our clients and their employees about the law and mechanics of ESOP’s. This blog series aims to provide startups a better understanding of ESOPs in Australia. We’ll focus on different area’s in each article to make the information digestible and relevant.
Our first article provides an introduction to employee share schemes generally, focusing in on why the Startup Concession is attractive.
Employee Share Schemes
An employee share scheme (‘ESS’) is a scheme under which shares, stapled securities or rights to acquire such shares (options) or securities in a company (known as ‘ESS interests’) are provided to an employee, a person in an employee-like relationship or their associate in relation to the employee’s employment.
Normally the issue of shares or options by a company in lieu of salary, wages or services provided by an individual will be ordinary income and therefore assessable to the individual at the time of issue. Income tax would be payable and additional PAYG may need to be withheld from the employee in the same way it is for wages.
Obviously this is not an ideal situation for the employee as they are paying tax on income where they may not receive the benefit of for some time, if at all (in the event the company fails). Hence, the ESS provisions provide concessional treatment of ESS interests in these circumstances.
This blog series will highlight the key issues when establishing and managing an ESS under the Startup Concession to ensure compliance with:
- Australian taxation law (ITAA 1997 Div 83A) and associated ATO requirements.
- Disclosure requirements under the Corporations Act 2001 and ASIC Class Orders.
It is important that both are addressed to avoid adverse taxation outcomes or breaches of the Corporations Act 2001.
The overarching benefit of applying the Startup Concession (where eligible) over other types of ESS is that the interests are taxed entirely under capital gains tax (‘CGT’) provisions at the time of disposal. This means that the recipient of the interests (the employee or a nominated company controlled by them), will not be taxed until they sell the interests. They may also obtain the benefit of a 50% CGT discount if they have held the interests for 12 months from the date of acquiring them (where the holder of the ESS securities is an individual or trust).
The Startup Concession applies to the exclusion of all other ESS taxation rules. That is, those eligible for the small Startup Concession cannot access either the $1,000 up-front concession or the deferred taxation concession.
There are various types of schemes with specific tax consequences for each type. Employers can offer more than one scheme and employees can participate in more than one scheme. Whilst this blog series deals with general ESS matters, it is specifically aimed at the implementation and management of an ESOP under the Startup Concession. For other types of ESS please refer to the Australian Taxation Office’s ESS Guide.
Eligibility for the Startup Concession
To be eligible to establish an ESOP under the Startup Concession there are three areas of criteria that need to be considered:
- The general eligibility criteria for all ESS.
- The Startup Concession company criteria.
- The Startup Concession offer criteria.
We’ll go into the eligibility criteria in more detail in our next article. If you would like to know if your company is eligible to use the Startup Concession now, please use our free pre-assessment below.
Find out more about how we can set up a successful ESOP for your startup here.