The Australian government has released exposure draught legislation proposing tax and regulatory changes that will make it easier to implement ESSs.
Employee incentive schemes (ESSs) are used by employers to attract, retain, and motivate employees by issuing shares, share options, interests in shares, or other benefits resulting from shares.
Proposed tax reforms
As per the tax reforms — announced in the 2021‑22 Budget — the government will eliminate the employment taxing point for tax-deferred ESSs for all companies. This change will take effect for ESS interests granted in the first income year following the enabling legislation’s Royal Assent.
The amendment will apply to ESS interests issued after July 1, 2022, at the earliest. Tax will be deferred until the earliest of the remaining taxing points.
Proposed regulatory reforms
Employers will not have to consider the Corporations Act 2001 while making ESS offers under the regulatory reforms.
They cannot, however, charge or lend to an employee to whom these remuneration packages are offered.
This means they will not incur unnecessary regulatory expenditures as a result of considering and complying with disclosure, licencing, anti-hawking, advertising, and on-sale regulations.
“By removing these regulatory barriers, it will be easier for businesses to attract employees with ESS offers, in addition to wages,” Assistant Treasurer Michael Sukkar said in a statement.
“Where employees pay, whether directly, or via a contribution plan or through use of a loan, to participate in an ESS, these reforms:
- Increase the value limit of eligible financial products that can be offered by unlisted companies in a 12 month period from $5,000 per employee to $30,000 per employee;
- Relax the requirements to lodge disclosure documents
- Consolidate exemptions and class order relief from disclosure, licensing, anti‑hawking, advertising and other obligations under the Corporations Act 2001”
“Furthermore, the proposed Corporations Act revisions will greatly lessen the current conditions that apply to the operation of ESSs that rely on regulatory relief,” Sukkar added.
Who is eligible?
The following individuals may be eligible to participate in an ESS:
- All employees and directors of the company or its associated bodies corporate
- Independent contractors predominantly provide services to the entity or its associated bodies corporate.
Craig West CEO of management consulting Succession Plus welcomed the move, however, noted that there’s still room for improvement.
“The Government’s focus on ESOPs is welcome as they can be an important succession planning tool for small to medium-sized businesses, however, there are gaps in the draft legislation.
“The changes we advocate for are:
“The 10% per employee limit needs to be increased as it prevents ESOP’s use as an effective succession planning tool for smaller businesses because having 10 owners doesn’t make sense for them.
“The focus on broad-based plans should be reconsidered so that it is not a detriment to smaller businesses.
“In many cases, smaller businesses use ESOPs to attract and retain key people in the management team.
“The salary sacrifice limit of $5,000 per person should be increased and the tax burden on employees prior to an exit or sale should be eased to encourage greater take up of funding options for employees to buy in,” West said.
Currently, companies with current plans do not need to amend or reconsider their arrangements.
However, companies, on the other hand, will need to evaluate their plan documentation and ensure that any tax advice supplied to employees and contractors is still correct for new awards made beginning July 1, 2022, under an existing plan.
“For grants made between now and 30 June 2022, the existing law is unchanged. The ending of employment, even if that occurs after 1 July 2022, will remain a taxing event, the statement read.
“However, for grants made after 30 June 2022, whether under an existing ESS or a new ESS, the ending of employment will no longer be a taxing event and any guidance provided to Plan participants should be checked to confirm that it reflects the proposed new law.”
The Exposure Draft Bill and Explanatory Memorandum for this measure are available on the Treasury website.
Submissions for both measures will be accepted between 29 July 2021 and 25 August 2021.
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