How well do you know Employee Share Schemes?

How well do you know Employee Share Schemes?

Employee Share Schemes

Did you know that more businesses from different industries such as technology start-up companies can take advantages of recent changes to the Employee Share Scheme (ESS) regulations. Now it is a great time to think about offering equity compensation for your company.

From July 2022, tax obligations for employees have been clarified, and employers’ obligations have been eased. Further, a new ESS regime has been induced as of 1 October 2022, replacing ASIC’s existing relief for employee incentive schemes. This has made it easier for companies to obtain relief and avoid complex disclosures and regulatory obligations under the previous regime.

Q: what is ESS?

Employee share schemes (ESS) are plans that provide employees with a beneficial interest in a share, stapled securities, or a right to acquire a beneficial interest in the company. They are aimed at creating ownership among employees and can have a life span of two to 15 years.

ESS is available to all companies, regardless of whether they are publicly listed or privately owned.

Q: how ESS benefit employers and what has been changed?

ESS incentivizes or compensates employees with an ownership stake in the business instead of cash. This is useful for startups that often sacrifice cash flow in the early stages but compete with larger corporations for top talent. Recent changes to ESS regulations in Australia have made it easier for companies to provide equity compensation.

The changes include:

  • The ESS taxing point – amended through the removal of the Cessation of Employment as a deferred-taxing point for ESS interests.
  • An unlimited issue cap – set by your company constitution. The 5% (listed) and 20% (unlisted) caps will now apply only to issues made for monetary consideration.
  • Increased flexibility – allow independent contractors to participate in their ESS.
  • Payments Exemptions – for share schemes offered to directors and employees that do not require payment.

Q: what are the ATO compliance requirements for employers?

The ESS rules require employers to provide employees and the ATO with details of the ESS interest.

To employees:

An ESS statement is required by 14th July each year who has:

  1. Acquired ESS interests under a taxed-upfront ESS at a discount during the financial year.
  2. A deferred tax point for ESS interest acquired under a tax deferred ESS.
  3. A start-up concession acquisition event occurred.

To the ATO:

Lodgement of an Employee Share Scheme – Annual Report to the Australian Tax Office (ATO) by 14th August each year.

Next Steps

If you have any queries about the ESS and the recent updates to ESS in Australia, please get in touch with our team.