Equity-based compensationTypical forms
What are the prevalent forms of equity compensation awards in your jurisdiction? What is a typical vesting period? Must the arrangements be offered to a broad group of employees, or can the employer select the participants?
Australian companies often link part of the remuneration of executives to the financial market performance of the company in the form of shares or options. While there is no set practice as to the typical length for deferring the entitlement, vesting periods of between one and three years are common. Some plans also provide for staged entitlements in tranches linked to the particular executive meeting performance targets over a range of time periods.
Some companies may also offer their employees the opportunity to buy shares in the company, via an Employee Share Scheme. Employee Share Schemes must comply with any disclosure requirements in the Corporations Act.
Must equity-based compensation be granted by the company’s board of directors (or its committee) or can the authority be delegated to officers or employees of the company? Are there limitations or requirements that apply to delegation?
The offer of securities to investors, including to employees, is regulated under Chapter 6D of the Corporations Act. Authority to issue shares will depend on the company’s constitution. Delegation limitations or requirements are taxation matters and outside the scope of our expertise.Tax treatment
Are there forms of equity compensation that are tax-advantageous or disadvantageous to employees or employers?
Employee share schemes (ESSs) may structure equity compensation in different forms. The type of scheme offered will generally determine the applicable tax treatment, with the default position being that such interest will be taxed in the income year in which the interest is received. Concessional tax treatment is available for employees who have received ESS interests under a taxed-upfront scheme if they also meet an income test of earning A$180,000 or less.
For employees who have acquired their ESS interests under salary-sacrifice arrangements, or where there is a real risk of forfeiture under the conditions of the ESS, these interests will be taxed in the income year that the deferred taxing point occurs. The deferred taxing point for a share is the earliest of the following:
- 15 years after the employee acquired the share;
- when the employee ceases the employment in relation to which he or she acquired the share;
- when there is no real risk of forfeiture; or
- when the ESS no longer genuinely restricts the disposal of the share.
If ESS interests have not been granted at a discount, the benefits given to employees may be taxed under other provisions of tax law, such as capital gains tax.Registration
Does equity-based compensation require registration or notice? Are exemptions, or simplified or expedited procedures available?
The offer of securities to investors, including to employees, is regulated under Chapter 6D of the Corporations Act. The Corporations Act requires that, unless an exemption applies, offers must be made under a disclosure document. Exemptions include offers made to senior managers of the entity and certain small-scale offers. In addition, an ESS annual report must be provided to the Australian Taxation Office after the end of each financial year.Withholding tax
Are there tax withholding requirements for equity-based awards?
Withholding tax may apply under a certain ESS where the employee has not provided a tax file number or an Australian business number by the end of the relevant financial year. An obligation to withhold tax may also arise with respect to non-resident participants in the scheme.Inter-company chargeback
Are inter-company chargeback agreements between a non-local parent company and local affiliate common? What issues arise?
In the case of stock options granted to employees of a local affiliate in a non-local parent company, a recharge (chargeback) agreement can provide that the local company agrees to reimburse the parent company for the costs associated with the equity-based compensation issued to its employees. This can be advantageous from a taxation treatment perspective, because it ensures the cost is attributed to the entity in which case a deduction may be claimed. A local tax deduction may be available in Australia if a recharge agreement is in place.Stock purchase plans
Are employee stock purchase plans prevalent or available? If so, are there any frequently encountered issues with such arrangements?
Employee stock purchase plans are available, with the most frequently encountered issue with such arrangements being the taxation treatment of such interests.