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[ New legislation on Employee Share Schemes ... Great for startups and the entrepreneurs out there! ]
by Michael Garrone Published

The Government has now entered a bill into parliament to give effect to proposals to reduce tax payable on “employee share schemes” (ESS’s) starting on 1 July 2015.

With growth back on the agenda for so many businesses, this legislation is great news!   For many of the businesses looking for growth, they know that both employee engagement and incentivisation are vital to achieving the overall enterprise goals.  

The aim of these changes is to improve the concessions available for both the businesses and employees.  They also aim to allow some further concessions to start-ups and companies in the innovation space so they can compete as an employer with foreign start-ups.

What’s an ESS?

ESS’s can be an effective way of rewarding performance and increasing motivation in team.  In addition to wages, employees may receive shares in the company which entitles them to future dividends and a share of the potential growth in the business.

What are the existing tax concessions?

To make an ESS attractive, shares are issued at a discount to market value. 

Without any tax concessions, this discount would be taxed to the employee up-front at their normal individual income tax rate [currently the maximum is 49% with the medicare levy and budget repair levy].

For example, if you are issued $10,000 worth of shares for $1,000 then the employee will have to pay tax on the discount of $9,000.  In some cases the payment of tax on the $9,000 can be deferred until a future event occurred.  For example, ceasing employment.

The concessions currently allow up to $1,000 of the discount to be received tax free [depending on your level of income], and the point at which you pay tax on the discount can be deferred.

Expanding the existing concessions

From 1 July 2015, it is proposed to expand the tax concessions in the following manner:

  1. Deferring when your employees can be taxed out to a maximum of 15 years [up from 7 years].
  2. The tax concessions will be available if an employee holds no more than 10% in the Company [an increase from the current 5%].
  3. The Government is proposing to work with Industry to find simplified measures to value company shares [the current process of substantiating market value, especially for unlisted shares, can be difficult and costly].
  4. There is also a proposal to simplify the documentation process for setting up an employee share scheme [something common to foreign jurisdictions where off the shelf schemes are available].

These are all great signs for small to medium enterprises who often baulk at the set-up costs of an ESS - let alone the complexity involved.

New concession

A new concession is also being aimed at the entrepreneurial spirits out there [including start-up companies]. 

Under the proposed legislation, provided the discount on market value is less than 15%, the entire discount will be tax-free. 

To be eligible:

  1. A Start-up is a company that has existed for 10 years or less [a very generous outcome]
  2. The turnover, in the year prior to the share issue, must be $50 million or less [including related businesses unless the related business is a venture capital or tax exempt entity that is a deductible gift recipient].

Where to from here

The new measures are expected to be legislated soon.  Hopefully this will mean an upswing in the use of equity to incentivise employees and drive growth in both new and existing businesses.  This is something that will not only benefit individuals from a tax perspective but is a massive opportunity for those businesses focusing on being a lean start-up and really involving the team in the business journey.

Watch this space for details of the final measures.

For information on the press release click here http://bfb.ministers.treasury.gov.au/media-release/032-2015/

If you have any questions please contact your usual bD Director or Michael Garrone.

Michael Garrone
read more by Michael Garrone

Michael is our Tax Specialist Director as well as the head of our business advisory niches of Building and Construction and Property.

With Michael's extensive experience and a real interest in these niche areas he is able to provide practical business and tax advice that is unique to the Building and Construction and Property industries. His tailored advice helps guide these businesses through start-up phase to succession and sale. Michael has many years’ experience in solving complex problems involving corporate tax, restructures, international taxation, Capital Gains Tax and GST. 

Michael also has a strong background in self-managed superannuation and is an authorised representative of superannuationDEPOT. In this area Michael provides strategic advice on SMSF structures and in particular limited recourse borrowing arrangements. Through this diverse experience Michael has developed expertise within a wide range of industries including building and construction, property, professional services (legal, engineering & finance), technology and software and manufacturing.

Michael Garrone is an authorised representative [No. 1240832] of Hunter Green Pty Ltd AFSL 225962. Your Adviser may offer you services through Depot Superannuation Pty Ltd which is a separate business. Although the same Adviser may offer you services under the above businesses, each business is solely and separately responsible for the advice they each provide. In particular, Hunter Green is only responsible for the financial planning services provided by Michael Garrone.

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