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While it is generally accepted that business owners are the most driven to see their business succeed, the same sort of vested interest can also give staff a sense of participation and a solid reason to see the company become profitable. Having a real stake in a company through owning shares in it is an incentive that some companies, particularly those listed on the stock exchange, have utilised.
Employee share schemes (ESSs) are a way to give staff a financial share of a company’s potential success, and as such have long been recognised as being a valuable tool to help companies attract and retain high-quality staff. Proposed changes to the law will make it more beneficial for start-up companies to remunerate staff in this manner.
2009 changes to ESS rules for tax purposes
Under an ESS, a company can offer its employees, as a form of remuneration and incentive, shares in the company or alternatively, an option/right to acquire such shares.
Since changes were made to the employee share scheme regime in 2009, fledgling enterprises and start-up businesses have been avoiding making ESSs available to staff due to the complex nature of the arrangements. Due to this, the changes have made ESSs less appealing for start-ups and smaller businesses.
The main reason is that the 2009 reforms taxed employees at the point of issue of the shares or options. In other words, the employee is taxed upfront unless special rules for deferral at the time of issue apply.
The drawback of this is that employees can become liable for significant tax based on the value of the shares or options for the income year in which they are issued, even if they are not earning any income or before this value is realised by selling. One online retailing executive described the present structure as being “like paying tax on the winnings of the lotto ticket before you win the lotto”.
Proposed ESS changes
To enhance the system, the government is going to amend the ESS rules. This is planned to come into operation for shares and rights that are granted on or after July 1, 2015. At this stage the proposed changes are still in draft legislation. At the time of writing, it is yet to be introduced into Federal Parliament.
Under the revised ESS regime, some key amendments include:
Specifically, for eligible start-ups:
It is worth noting however that where an employee is subject to the discount up-front under an ESS, the concession that exempts from income tax the first $1,000 of share scheme interests given to an employee who earns less than $180,000 a year, will still be retained. The government had introduced this measure in 2009 to prevent highly paid executives from benefiting from a reduction to their tax liability if they were to be remunerated with shares or options.
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