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ESS legislations change good news for Australian startups

Changes to employee shares scheme (ESS) legislation may bring benefits for Australia’s startup sector. 

As a part of their 2021-2022 budget, the Federal Government is discussing the implementation of changes in the employee shares scheme (ESS) legislation. The changes would take the form of tax and regulatory reform, effectively removing the red tape in implementing ESS programs or plans.

Treasury lists the following changes in consideration for the regulatory reform: 

  • Completely removing Corporations Act 2001 requirements for ESS offers to employees who do not pay or incur debt to participate in these schemes;
  • Increase the value cap, under which Corporations Act 2001 requirements do not apply, to $30,000 for all other ESS offers of unlisted companies;
  • Consolidating exemptions and class order relief from disclosure, licensing, hawking, advertising and other obligations under the Corporations Act 2001;
  • Expanding relief for unlisted companies to include contribution plans and limited or no recourse loans, where an employee can make a monetary contribution to acquire eligible financial products;
  • Relaxation of the requirements to lodge disclosure documents.

Treasury said the new legislature would assist “viable, but cash poor, business to hire employees with ESS offers, in addition to wages.” 

What is an ESS

The employee shares scheme allows employees to purchase shares in the company they work for. An ESS business plan means that while employees earn a wage, they can benefit from the growth of the company through earning capital gains on their shares.  

Craig West, Succession Plus CEO and founder, describes ESS plans as, “An Employee Share Scheme is a plan designed to allow employees to buy equity in the business they work for, allowing them to benefit from both capital growth and income.” 

Craig says that not only are ESS plans good for employees, but for businesses owners too, who can benefit from higher staff retention, more motivated staff and lower demand for cash. 

He writes, “At the same time, it allows business owners to provide a different type of remuneration (non-cash) to attract, retain and motivate key employees. 

“This is particularly important at the moment with a very tight labour market and owners looking to grow capacity. ESSs also come with generous tax concessions, introduced in 2015 as part of the then-government’s innovation agenda to encourage.” 

Legislative changes 

Broadly, the changes outlined in the Parliamentary Inquiry “Owning a Share of Your Work: Tax Treatment of Employee Share Schemes” will positively impact not only the uptake of usage of ESS plans by startups but also their effectiveness. The proposed changes primarily in-act ESS tax reform.  

Mr West said, “The changes would increase further tax concessions and benefits, broadening both the dollar amount and the availability of the existing concessions.

“For example, they would raise the limit on tax-free shares and salary sacrifice amounts. They would also simplify the compliance and regulatory regime that employee share ownership plans operate under, currently a significant barrier to some startups.” How ESSs can benefit startups 

Startup founders and industry experts say implementing an ESS plan can prove invaluable to a startup. Changes laid out in the new legislation may have the power to revolutionise the Australian startup sector. 

By reducing the burden of cash, the barrier of attracting and retaining the quality staff needed for successful startups is lowered. By incentivising startups, Australia could see a boom in innovation.  

Mr West said, “Many startups are short of cash but still need to attract key resources to build the business. With an ESS, a large part of the employee’s remuneration could be provided in equity rather than cash, preserving cash for the company, rewarding the employee and aligning the employee with the owners.” 

Nicholas Bouris, Managed App co-founder and managing director, used an ESS when starting his business. He said implementing an ESS was crucial to the quick success of Managed App.

Mr Bouris said, “It’s been great – we now have two employees using part of their annual salary to buy shares in the business. Success can only come from the hard work of employees. They are best incentivised as owners/employees versus just pure employees.” 

He listed the following reasons as to why he chose to use an ESS plan. 

  1. Help retain good employees (make them feel like founders and owners). 
  2. Help cash flow. Cash is low in a startup business, and paying with stock helps get employees to market-rate without digging into company bank accounts to get it. 
  3. To incentivise employees to work hard. Making the company more 
  4.  Valuable through their own hard work will make their shares more valuable (goal congruence). 

The changes outlined 

The report outlines several proposed changes; Mr West states that 18 of these recommendations will have a positive outcome for startups. 

The following are four of the most significant changes for startups and their impact outlined by Mr West: 

Recommendation 6 

3.75 The Committee recommends that the following changes be made to the definition of a ‘startup’ for tax concession purposes: 

  • The definition be extended to listed companies that otherwise fulfil the criteria to be considered a ‘startup’.
  •  • The aggregated turnover test be removed to relate to wholly owned groups or entities that can be shown to be controlled by the entity as per the definitions of control under the Corporations Act 2001. 

Craig: “Very positive. Opens up access to the very generous startup concession to listed companies and larger businesses.” 

Recommendation 8 

3.82 The Committee recommends increasing the $1,000 limit in section 83A.35(2)(a) of the Income Tax Assessment Act 1997 to $50,000. 

Craig: “Very high impact. Increasing the salary sacrifice limit will encourage more employees to acquire shares in a reasonably tax effective manner.” 

Recommendation 11 

4.72 The Committee recommends that the requirement for a maximum 15 per cent discount under the Income Tax Assessment Act 1997 startup regime be scrapped. 

Craig: “Positive. Increasing the discount available will encourage more employees to buy in.” 

Recommendation 17 

4.87 The Committee recommends removing the real risk of forfeiture requirement for shares and removing the 75 per cent offer requirement for shares. 

Craig: “Very high impact. Both are a real issue for business owners, especially for succession planning in smaller businesses. 

“Removing the real risk of forfeiture requirement means there doesn’t need to be a risk of losing the shares, and the 75 per cent offer requirement means that for startups looking to reward key people or to use the plan for succession they don’t need to be restricted by having to implement a broad-based plan.” 

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Heidi Heck

Heidi Heck

Heidi Heck is a Journalist at Dynamic Business. She is a student at the University of Queensland where she studies Journalism and Economics. Heidi has a passion for the stories of small business, as well as the bigger picture of economics.

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