Cake Equity | Fresh Out of the Oven – ESOP Tax Reviews

Fresh Out of the Oven – ESOP Tax Reviews

March 16th, 2020   —   Charlie Ross

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You may have seen recent Employee Share Scheme (ESS) chatter in the business press, such as this article in the Australian Financial Review, discussing the upcoming government inquiry into the tax treatment of the schemes. 

In general, the federal government will be reviewing tax barriers that might deter certain businesses to provide employees shares. The aim of the review is ultimately to increase the use of employee share schemes across Australia, as there are no doubts that it is an effective way for emerging companies to attain and retain quality talent, and keep them incentivised throughout their career.

Technology entrepreneurs, including Atlassian founder Mike Cannon-Brookes, have urged the government to overhaul the tax rules for employee shares and options. Many other well-known start-up personalities and companies will be making submissions in support of the overhaul.

While the 2015 Coalition led tax changes did enable many start-ups to utilise Employee Share Schemes with significant tax benefits to both the employees and the employers, not all companies are able to use this concession. For example, companies over 10 years old, or companies earning over $50 million annual revenue, miss out on this ‘start-up concession’. Cannon-Brookes is pushing for these barriers to be lifted, and we are optimistic the inquiry will make this happen. 

In addition to the removal of those barriers above is the goal to also remove the restriction of offering more than 10% of equity in a company to a participant under an ESS in order to qualify for the start-up concession. Where companies have very few employees, it makes sense that they may wish to offer more than 10% of ownership to certain senior employees to incentivise their alignment to business goals and performance.

We are completely in support of the benefits being made more available to growing companies that are missing out on the value that employee share schemes can provide. And of course, we are in support of the current start-up concession being extended to allow more opportunities for current participants.

In the words of Employee Ownership Australia deputy chairman, the tax and regulatory systems need to “promote, not prevent” employee equity.

In short, all this chatter is a great thing for employee share schemes, and we look forward to seeing tax benefits being made more available to more companies. We will keep you tuned! 

If you liked this article, check out What’s the difference between an ESS and an ESOP? or What is the Start-up Tax Concession, and why bother using it?

This blog is designed and intended to provide general information in summary form on general topics. The material may not apply to all jurisdictions. The contents do not constitute legal, financial or tax advice. The contents is not intended to be a substitute for such advice and should not be relied upon as such. If you would like to chat with a lawyer, please get in touch and we can introduce you to one of our very friendly legal partners.