Private companies often want to motivate, reward and ensure key employees stay with the business, but are often not sure how to go about this.
In such cases, consideration should be given to the ESS (Employee Share Scheme) concessions for start-up companies (start-up concessions) and the amended deferred taxing point rules that apply to options under deferred taxing schemes.
From 1 July 2015, small start-up companies are able to offer potentially greater concessions to their employees under an ESS scheme if the scheme satisfies certain conditions.
What is a start-up?
The term start-up is not actually defined in the legislation and the rules are not limited to a particular type of business or industry. There are, however, a series of conditions that a company must meet in order to be eligible for the start-up rules.
The conditions that must be satisfied by the employer for concessional treatment to apply are:
- The company and all group companies must be less than 10 years old;
- The company and all group companies must not be listed on a stock exchange;
- The company and all group companies must have an aggregated turnover of less than $50 million;
- The company must be an Australian resident taxpayer (the shares can be in a foreign company though); and
- Where shares are issued, an offer of the ESS must be made to at least 75% of Australian permanent employees with at least 3 years of service.
Further to the employer requirements, there are also conditions that must be satisfied by the ESS interest. In the case of a share, it must be issued with a discount of not more than 15% of the market value of the share. In the case of an option, it must have an exercise price that is greater than or equal to the market value of an ordinary share at the time the option is acquired.
Additionally, an employee is required to hold their options or shares for at least three years or until the employee ceases employment and the employee cannot own more than 10% of equity (including any unexercised options) in the company.
Where the above conditions are met, the discount on an ESS interest issued is not included in an employee’s assessable income.
In the case of options, participants can defer tax until the shares acquired under the options are disposed of. Participants will be taxed at that point on capital account on the sale proceeds less any amounts paid for the shares. As the option/shares must have a 3 years holding period, the participant should only be taxed on 50% of the capital gain. This is still the case where options are exercised and the shares are sold within 12 months of this event. This is not the case for options not obtained under the start-up rules.
The start-up ESS concessions are a cost effective way to provide tax efficient share option arrangement for employees.
Please contact (08) 9474 6333 should you wish to discuss this matter further.