Employee Share Scheme

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Attracting, training and retaining good employees is an ever-increasing issue in the business world and likely to be something all business owners in a post COVID-19 world will have to face more often.

Many of our clients have asked us to look at an Employee Share Scheme (ESS) as vehicle to address this issue.

Whether you are a start-up or an established business it is worth considering whether an ESS could work to keep your valued employees or attract talented people whilst also reducing costs.

But be warned it has to be done correctly and it can be a win-win for you staff.  If it is done incorrectly it could see staff lose out to the taxman.

What is an Employee Share Scheme?

Put very simply, an ESS is a plan that offers employees shares or options in your company. The business must be owned or operated by a corporate structure, that is a company.

You would already know what a share is but often people are not familiar with what an option is.

A person who holds an option in a company can buy shares once certain conditions are met. Once they exercise their option, they become a shareholder in the company. 

What are the benefits to the parties?

If you are a start-up, an ESS can assist in attracting or retaining talent by giving them shares or options in exchange for paying a lower salary than they could get on the open market.

For a more established business, an ESS can help you keep employees during more challenging times.

Alternatively, if due to economic conditions you need to reduce salaries, an ESS can help you compensate your employees, and it goes a long way to show them how valued they are.  It also enables them to keep working through tough economic times rather than being retrenched or let go.  It can be a very positive statement to an employee.

It is a great incentive as they have some skin in the game and as the business improves financially so their shares increase in value. 

provides a further incentive to stay focused on achieving goals together. 

Would I be better of giving my employees discounted shares instead?

You can issue your employees with shares upfront at a discounted price instead of using an ESS.

However, unless you do this when the value of the shares is low or nil, the employees will be taxed on the discount because it will form part of their taxable income. 

Where is an ESS is tax-friendly because employees don’t need to pay tax on their shares or option until they sell it, and when they do, they should be eligible for a capital gains tax discount of 50% if they’ve owned the shares for more than 12 months). 

Additionally, there are even more incentives for start-ups as long as you don’t have significant tangible assets. You can offer your employees an employee-friendly option exercise price which is the price they will pay to turn their options into shares if:

  • the company hasn’t raised more than $10 million capital in the last 12 months;
  • the company does not expect a change of control within six months of the share valuation;
  • when valued the company has either been incorporated for less than seven years or is a small business entity; and
  • a financial report is produced for the income year of the valuation, compliant with accounting standards.

The above is known as the safe harbour method.

Is my business eligible?

To be eligible:

  • you must be an incorporated company in Australia within the last 10 years, and your main business can’t be investing;
  • you cannot offer shares or options to an employee who holds more than 10% of your company’s shares or controls more than 10% of the vote at a general meeting;
  • the company cannot have earned aggregated turnover in the last income year of over $50 million;
  • the shares or options cannot be listed on a public stock exchange;
  • if the ESS is for options, the share price must be at least 85% of fair market value unless you are eligible for the safe harbour valuation;
  • if the ESS is for shares, you must offer shares to at least 75% of your Australian resident permanent employees who have completed at least three years’ service;
  • if the ESS is an options scheme, employees must pay at least fair market value to exercise the right;
  • all the options or shares relate to ordinary (not preference) shares; and
  • the employees are able to sell their shares or options when their employment ends or after three years of the date they were granted.

How do I value my company for an Employment Share Scheme?

You must either obtain a formal evaluation to ensure it meets the Australian Tax Office (ATO) safe harbour guidelines or you can use a simplified valuation method if you meet the ATO’s net tangible assets test.

How can FC Lawyers help?

At FC Lawyers, our business and corporate team has assisted clients all over Australia with walking them through and setting up their Employee Share Schemes.

It is important to note that not only is there detailed documentation to be provided to set the scheme up but an ESS comes with annual reporting obligations to the ATO which we can assist with through your accountant.

Even if you’re not eligible for an Employee Share Scheme, our team can discuss and recommend other options that may be available to you.

Contact our team today to discuss your legal requirements.

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