Proposed Federal new rules have been released by the Government – for comment – with an objective of correcting, at least partially, the disincentives created by the current law.
So effective were they in curbing perceived old problems with the then existing laws, that many companies – and in particular start- up companies – had largely shied away from retaining or introducing share plan arrangements.
Ownership, particularly in start-ups, is to be encouraged particularly where cashflow for salaries is limited.
The proposed ESS changes seek to:
- defer the taxing point on rights to acquire shares until exercise for up to a maximum of 15 years, unless employment terminates earlier or when there is no risk of forfeiture of the rights and sale restrictions are lifted
- defer the taxing point on shares for up to a maximum of 15 years, unless employment terminates earlier or when there is no real risk of forfeiture and sale restrictions are lifted
- allow for a refund of tax where an employee has been assessed on a discount amount but chooses not to exercise a right to acquire shares
- ensure employees of start-up companies (generally, a company that has an aggregate turnover of less than $50 million and has been incorporated for less than 10 years) who receive a small discount on shares (the discount being less than 15% of the market value of the shares), are exempt from tax and receive a market value cost base for the share for CGT purposes
- ensure employees of start-up companies who receive rights where the exercise price is equal to or greater than the market value of the share are taxed under the CGT rules and receive a cost base equal to the exercise price.
Five Ways to Provide Employees an Interest in Your Business
Free Shares to Employees
Under current legislation, a business can issue up to $1,000 worth of free shares to each employee in the business without paying tax on them. The offer must be made on the same terms to 75 per cent of employees and held for at least three years.
You could also choose to offer select employees options (a right to buy or sell an interest) over the equity interest in your business. Options are usually issued for free but are exercisable after a fixed period has elapsed.
For example, three years after the options are issued, if employees have performed well and the business value price has increased, the exercise price will be less than the then prevailing share price. By exercising the option, the employee will achieve a profit equal to the difference between the price when the option is exercised and the exercise price.
Fully-Paid Interest and Loans
In this method, the business offers loans that allow employees to purchase an interest in the business. The interest in the business is then used to repay the loan. As an incentive, the loan is usually provided at a low or zero interest rate. In addition, the shares may be offered at a discount to the then prevailing market price. If the loan is not repaid, the business’s recourse is generally limited to the value of the interest.
In this method, the business issues partly-paid interests to employees. The interest can either be zero-paid or employees can pay a small amount of the issue price of the interest upfront. Employees then pay up the interest over time — usually out of income declared on the interest.
A unit trust is set up to hold units in the business. Employees are issued with units in the trust, rather than an interest in the business. The rights for employees are governed by the unit-trust deed which allows an employee to redeem the units after a set period has elapsed or on the termination of the employee’s employment. Redeeming units usually requires the sale of the underlying interest and the distribution of the sale proceeds to the employee.
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