Employee Share Scheme - New Legislation from 1 October 2022

As originally announced in this year's March Federal Budget by the then-Morrison Government, new reforms surrounding Employee Share Schemes (ESS) available to employees have now received Royal Assent, with revised legislation to take effect from 1 October 2022.

The new regulatory relief aims to expand access to ESS incentives for employees of listed and unlisted companies, allowing those to benefit from a larger share of business growth.

Historically, the provision of Employee Share Scheme offers have been implemented by start-up or cash-poor businesses, allowing them to compete financially in attracting and retaining talent through extended avenues to share in the growth and the success of the employer.

The introduction of new reform seeks to create a more streamlined regulatory approach and provide further assistance to such businesses. To do this, the reformed Act removes Corporations Act 2001 (Cth) requirements for ESS offers to employees or directors in certain circumstances.

Ahead of the new Rulings taking effect in October, we have summarised the incoming changes to Employee Share Schemes for listed and unlisted companies.

Removal of Corporations Act 2001 (Cth) in Certain Circumstances

The new reform now outlines where requirements under the ESS Act are met, the following regulatory relief is available to companies that implement an eligible scheme:

• the existing disclosure requirements (e.g. the requirement to produce a prospectus) under the Act do not apply to offers under the Scheme;
• the Scheme can be operated without an Australian Financial Services licence;
• general financial advice can be provided in relation to the Scheme without an Australian Financial Services licence;
• the restrictions on advertising and hawking securities and financial products in the Corporations Act 2001 (Cth) do not apply to the Scheme;
• the design and distribution obligations do not apply to the issue, sale or transfer of interests under the Scheme

New Reforms for Listed Companies & Trusts

The soon-to-be in effect legislation provides exceptions for Listed Companies & Trusts in certain areas, provided the ESS offer from an employer meets a number of requirements - including:

• the offer is made by a complying offer document;
• the offer complies with the issue cap in 's1100V - Directors' Liability' provision (the cap is 5% for listed companies and trusts, but the constitution can increase the cap, and 20% for unlisted companies)
• if the securities are offered under a contribution plan, the plan must meet the Division 1A requirements, 's1100t - Required Disclosures', which contains various protections for employees;
• if a loan is provided in connection with the offer, the loan must meet the Division 1A requirements - ensuring there is not risk the employee.

New Reforms for Unlisted Companies

Likewise, the rules for unlisted companies (there are no exemptions for unlisted trusts) are the same as for listed companies and trusts, with the following variations:

• as noted above, the issue cap for private companies is 20%;
• the offer document must be accompanied by financial information about the company and a valuation of security offered or other assurances as to valuation;
• the employee must be given a 14-day cooling off period and the offer document must contain specific disclosures;
• the offer must be within the monetary cap of $30,000 per annum (subject to various adjustments)

The monetary cap is one area where additional relief is provided by the new changes, including:

• the limit on the size of purchases of shares by employees of unlisted companies will be increased from the current cap of $5,000 per year to $30,000 per year;
• if an employee holds unexercised options, the employee may accrue their yearly cap over a five-year period or to a maximum of $150,000;
• the monetary cap will not apply where the company is sold or listed through an initial public offering shortly after employee securities are issued.

Regulatory Relief for ESS Tax Treatment

in addition to the relief outlined above, the Employee Share Scheme taxing point will be amended through the removal of the Cessation of Employment as a deferred-taxing point for ESS interests.

This revision has already taken effect per 1 July 2022 and applies to all ESS interests (including existing ESS interests) that are subject to deferred taxation provided that the Cessation of Employment occurs on or after the outlined date. 

Reporting Obligations involved in Employee Share Schemes

Whilst income changes will not impact reporting obligations, those employers engaged in ESS interests with employees must ensure the following:

• correctly identifying tax points in accordance with relevant legislation. Taxing points can be triggered by the grant, vesting or exercise of employee equity. Under Australian legislation, a taxing point may also arise if non-vested employee equity remains engaged after the termination of employment;
• provide an Employee Share Scheme - Statement to participants by 14th July each year;
• lodgment of an Employee Share Scheme - Annual Report to the Australian Tax Office (ATO) by 14th August each year.

For More Information

For more information on the new legislative revisions involving Employee Share Schemes or to discuss a review of your current ESS interests, please contact the Archer Gowland Redshaw adviser team on (07) 3002 2699 | info@agredshaw.com.au.