In summary

Employee share schemes are a way to attract and retain talent and align an employee’s interests with the company. The House of Representatives Standing Committee on Tax and Revenue (Committee) will inquire and report on the tax treatment of employee share schemes and invites submissions to assist in its review.

In detail

Benefits of an employee share scheme

Employee share schemes (ESS) are often used to attract and retain talent and to align the interests of the employee with the company. ESS are particularly useful for startup companies as they often have limited cash resources and it could otherwise be difficult to be competitive in attracting and retaining employees.

The current landscape

The ESS rules in Subdivision 83A of the Income Tax Assessment Act 1997 (Cth) (ESS rules) provide concessional tax treatment for qualifying arrangements. The last major amendments to the ESS rules were in 2015 and included:

  • extending the maximum deferral time from 7 to 15 years;
  • increasing the ownership limit from 5% to 10% and including rights over shares;
  • extending the deferral of tax on qualifying rights to when the rights are exercised rather than when exercisable;
  • introducing an alternative to the real risk of forfeiture condition for rights; and
  • introducing concessions specifically aimed at startups.

In seeking to make these concessions more accessible to eligible startup companies, the Australian Taxation Office (ATO) also released standard document templates to assist in establishing and operating an ESS. Greenwoods & Herbert Smith Freehills and Herbert Smith Freehills were heavily involved in assisting the Government in preparing the standard document templates in 2015.

The Committee’s inquiry

The House of Representatives Standing Committee on Tax and Revenue (Committee) will inquire and report on the tax treatment of ESS. Broadly, the questions for consideration focus on:

  • the effectiveness of the 2015 changes;
  • the costs and benefits of concessional and deferred tax treatment;
  • the relevance of the startup concessions;
  • how ESS arrangements are currently structured and how the tax treatment affects this;
  • challenges faced in setting up ESS arrangements; and
  • the usefulness of the ATO standard documents.

Have your say

There are a number of improvements that could be made to the ESS rules and we will be preparing a submission. Specific areas include:

  • removing the cessation of employment taxing point. This can already be managed via rights plans, and it is increasingly common that post termination performance hurdles remain in place;
  • removing the $5,000 cap for salary sacrifice into shares;
  • removing the 3 year disposal restriction for startup options;
  • removing the requirement that a startup cannot be a company older than 10 years; and
  • removing the 10% ownership limit for employees who can benefit from these concessions.

If the Committee’s inquiry is of interest to your business and you would like assistance in drafting a submission, please contact Cameron Blackwood or Toby Eggleston.