Budget Reforms to Employee Share Scheme Reveals Boost for Local Startups

Treasurer Josh Frydenberg has introduced changes to employee share scheme (ESS) regulations in the recent unveiling of 2022’s federal budget. The changes should make it simpler for Australian startups to attract and retain talent, providing a boost for the tech startup sector who operate within an incredibly competitive talent pool. An employee share scheme or an employee share purchase plan, offers employees direct financial interest in the startup they work for. Under an ESS, employees can obtain or buy shares in a startup through salary sacrificing, the acquisition of dividends and loaning options. This promotes positive relationships and reduces staff turnover. 

The changes to ESS regulations have come after a commitment by the Treasurer to review the scheme in last year’s budget, with the changes set to be implemented before the next election. These changes come after significant demand from the startup tech sector and should grant attractive incentives to startup employers competing against larger, international businesses. Currently, the sector is experiencing massive skill shortages so the timely changes to ESS regulations will likely be a huge help to startups hoping to offer greater and more competitive financial packages and bonuses to their startup employees.   

Key Changes to ESS Regulations

Cessation of Employment

From July 1, 2022, the cessation of employment will be removed under the ESS scheme. This will apply to all new and existing ESS interests that have not reached an ESS taxing point before the date. The change will alleviate the unfunded tax liability formerly triggered by taxation on ESS interests when a startup employee ceased employment. From July, that interest will no longer be taxed until the right has been exercised and any pre-existing disposal restrictions on shares have been lifted. 

Changes to Share Options

An in-depth breakdown is still yet to be released by the Treasurer. However, it is looking like shares and options issued by Australian startups will soon be treated the same way in relation to tax. Current tax options have been more onerous on Australian startups than for large, multinationals domiciling elsewhere for tax purposes. Listed companies and senior management at these ventures have generally been favoured due to regulations outlining caps on the number and value options that can be issued to employees of unlisted companies. This forced many Australian startups to seek alternative international options, which has not been ideal for the sector. The changes to current ESS regulation should remove prior incentives for Australian startups to move their tax domicile offshore. 

Changes to the ESS Cap

The ESS regulation changes will scrap the cap on the value number of share options that can be issued and will be replaced with a fixed cap of $30,000. This will be accruable for any unexercised options for up to $150,000 over a maximum of five years. Reportedly, the monetary cap will not apply to the sale of a business or an initial public offering (IPO).   

Simplified Disclosure Rules

Under the changes to ESS regulations, startup employees who are offered shares at no cost will no longer have to provide a disclosure statement. Instead, only a simplified disclosure statement will be necessary with the purchase of shares or options. Formerly, startup employees were stuck with onerous and complicated obligations under the scheme, so the alternations to ESS regulations should make participation simpler.  

Need Help? Contact Us  

Setting up an employee share scheme can be tricky, particularly as the rules and regulations are always changing. Fortunately, our team of startup experts at Allied Legal can help. You can connect with one of our startup experts by giving us a call on 03 8691 3111 or sending us an email at hello@alliedlegal.com.au.