Reforms to the employee share scheme regime - greater access, less red tape

The new Treasury Laws Amendment (Costs of Living Support and Other Measures) Act 2022 (‘Act’) introduces tax and regulatory amendments to the current employee share scheme (‘ESS’) regime.

The reforms aim to decrease red tape for companies that issue options or shares to employees as part of an ESS. This makes it easier for businesses - particularly startups - to issue shares to their employees and, in turn, attract and retain talent. A tech/startup lawyer can give specific advice to help get your ESS running.

Major amendments to the ESS scheme

1. Eligible participants 

Under the current ESS scheme, only employees, directors and certain independent contractors can be remunerated with shares. The new reform expands the scope to cover all people who provide services to a business.

2. Tax liability for employees who receive ESS interests 

ESS interests given to employees are taxed either at the time of grant or on a deferred basis. If the ESS grant is subject to tax on a deferred basis, under the current regime, tax would be deferred until the earliest of: (1) vesting or exercise of the interest; (2) cessation of employment; or (3) 15 years from grant.

The second taxing point - that is, cessation of employment - had been a major area of concern. That is because, if employees who leave their employment before those interests have otherwise been taxed, they will be required to pay tax before realising any value from those interests.

Under the new reform, cessation of employment will be removed as a deferred taxing point.

3. Amendments to disclosure obligations 

Currently, offers of shares or options to employees require a company to comply with onerous disclosure obligations (such as, preparing a prospectus) under the Corporations Act 2001. Under the new reforms, such disclosure obligations will no longer apply to offers under an eligible ESS scheme.

The above article was written by Pippin Barry (BA, JD - 2012, The University of Melbourne), an Australian Legal Practitioner.