After a lengthy consultation period considering proposed changes to the Employee Share and Option Scheme (ESOP) rules, the Federal Government appears set to announce, as part of its “Competiveness Agenda”, changes to the ESOP rules as they apply to “start up” companies.

In this Alert, Special Counsel Justin Byrne discusses the anticipated changes.

Key points:

  • Currently, it is often the case that an employee will be taxed in the year in which he or she receives an employee share scheme share or option.  Important changes were made to the ESOP rules in 2009 which affected the ability for the tax to be deferred until a later point in time.  The Federal Government has recognised that the changes (introduced by the previous Government) were discouraging business expansion, particularly for “start up” companies.
  • It is anticipated that the new rules will do away with tax being paid “upfront” upon the receipt of the shares or options in an ESOP.  This would be a “win win” for both employer companies, as well as employees.  The change would be welcome for companies seeking to grow their businesses through employee share ownership, rather than cash based incentives.
  • It remains to be seen whether, as part of the proposed changes, tax will be payable at a future point in time, for example as a taxable capital gain upon eventual sale of the shares or options. 
  • As part of the consultation process, the Government considered various options, including the model adopted in the United Kingdom, whereby no tax is payable on the receipt of employee share scheme shares or options up to a maximum value of £250,000.00 per employee (and subject to a maximum £3 million in total for the employee share scheme), provided that the company in which the employee is receiving shares or options has gross assets valued at £30 million or less.
  • Draft legislation has not yet been released, however its release is expected in the very near future.

If the proposed changes are as anticipated, there is likely to be a very substantial benefit for companies adopting employee share schemes under the new rules.