Employee Share Scheme Changes

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Employee Share Schemes Changes

Business owners of course want their business to succeed and be profitable year after year. When employees are offered a vested interest in the business and participate in the profit sharing, they have a sense of ownership in their role and are less likely to leave. Many companies are now recognising this trend, particularly those listed on the stock exchange.

Employee Share Schemes, or ESS, are a programme to give staff part of the profits and share in the success of the company. It’s not only a valuable benefit to the staff, but helps attract and retain high-quality team members. Proposed law changes in ESS will now make it easier for new businesses to offer this type of compensation to staff.

2009 Changes to Employee Share Scheme law for Tax Purposes

Under the current Employee Share Scheme legislation, a company may offer shares in the company or the option to purchase shares. Since changes were made in 2009, many start-up companies have been avoiding Employee Share Schemes due to the complex nature of the rules.

Essentially the employee is taxed up front for the share unless special rules apply at the time of issue. This can be a major drawback because the employee may be liable for a significant tax based on the value of the shares or options, even if they are not earning any income or before the share is sold. One executive said, “It’s like paying tax on the winnings of a lottery ticket before you win the lottery.”

Proposed Employee Share Scheme legislative changes

The government is planning to change some of the rules around Employee Share Schemes that should make them much more attractive to employers. The changes are still in draft form, and are in line to be introduced to Federal Parliament soon. These changes will hopefully be in effect for shares granted on or after July 1, 2015.

Some of the Employee Share Scheme amendments include:

  • Taxation of rights at exercise: Businesses can give staff members discounted rights or option to purchase shares which will only be taxable when exercised, or when they receive value. There will be other conditions that may apply.

  • Concessions for start-ups:  Start-up businesses will be granted certain concessions under the new Employee Share scheme. This specifically applies to companies that have aggregated turnover of less than $50 million, are unlisted in the stock exchange and have been incorporated for less than ten years. It also states that the shares or rights be held for at least three years. This shall apply as follows:

** For Shares: Will allow an income tax exemption for shares to employees with a discount of up to 15%.

** For Options: Will not be taxed upfront upon issue, but will follow the capital gains rules at the time it is disposed of.         

  • Changes for deferred taxing arrangements: The government also proposed that the maximum length of time for tax deferral for options or shares be increased from seven to 15 years.

 If an employee is subject to the up-front discount, the concession on the first $1000 is retained if they earn less than $180,000 a year. This stipulation is in place to prevent highly paid executives from benefiting from a reduction in their tax liability, if they were remunerated with options or shares. If you have any questions about the proposed Employee Share Scheme changes or how it may affect your business, our accountants in Caulfield can help.

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Disclaimer:

Hillyer Riches Management Pty Ltd is a Corporate Authorised Representative (No 466483) of Capstone Financial Planning Pty Ltd. ABN 24 093 733 969. AFSL / ACL No. 223135.This document contains general advice only and is not personal financial or investment advice. Also, changes in legislation may occur frequently. We recommend that our formal advice be obtained before acting on the basis of this information.

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