An Employee Share Scheme (ESS) is an employee benefit plan that gives workers an ownership interest in the company. ESSs can be created in many shapes and sizes and have become increasingly popular in Australia for privately owned companies to incentivise employees, retain personnel and recruit talent.

ESSs mean that when employees go above and beyond and their company performs well, the employees receive a financial benefit and everybody wins.

The financial benefit to employees can be in the form of an ownership share at the time, or an option to purchase a share in the company at a later date for a price locked in now.

ESS Legislation and Taxation

In 2015, the legislation governing the tax treatment of ESSs was changed to make them more attractive for start-ups and small businesses. Prior to 2015, when an individual received equity under an ESS, the market value of that equity would be taxed when the employee received it. Since 2015, under certain circumstances, the equity is only taxed when the employee sells the equity.  This allows the employee to match the timing of their tax liability with the cash they receive.

Even better, the most recent Federal Budget has proposed to remove some further red tape and restrictions around ESSs, making this option available to a wider range of companies and employees.

Getting Advice on ESSs

Despite government measures reducing red tape they are still complex, and each ESS should be unique to the company implementing it – there is no one-size-fits-all approach.   It is critical to consider how it would work for you and your business, both from administrative and tax perspectives. This will require engaging a solicitor to draft the ESS and an expert business valuer to assist with determining a market value of the company so the tax implications can be understood by both employer and employee.

Not every company or employee is eligible for ESS start-up and small business tax concessions, so it is also important to review your eligibility for these before getting too far down with road with an ESS set up.

How We Can Help

If you would like to explore how an Employee Share Scheme could be used to attract and retain your employees, please feel free to contact Tony Carter below or call (02) 4969 6600.