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Employee Share Schemes

The Federal Government has recognised employee share ownership as something that should be encouraged.  It has set a target to increase the percentage of employees receiving shares as a benefit from employment from 5.5% in 1999 to 11% in 2009.

To encourage this increase it has introduced measures in the tax system that provide favourable treatment of the discount provided to an employee when issued shares by an employer. Normally the value of any shares, if given to the employee for nothing or in return for salary sacrifice, should be included in the assessable income of the employee in the year the shares were received. There are two tax benefits available which provide either an exemption from tax or a deferment of tax.

Exemption
No tax is payable if the benefit received by the taxpayer is less than or equal to $1,000 each year. To qualify the employee share plan must satisfy criteria which include:
the shares must not be subject to forfeiture (e.g. when employment ends);
the shares cannot be sold for three years or until employment ends; the plan is open to at least 75% of employees.

Deferment
The discount received (100% of the value of the shares in the case of a salary sacrifice) is not required to be included as income until, broadly speaking, the shares are sold or the employment ends or 10 years elapses. This enables employees to sacrifice salary and receive shares to the value of the pre-tax amount of the salary sacrificed. However it does mean that when the shares are sold, the value of the shares is treated as income as opposed to recording a capital gain on the increase in the value of the shares.

There are a number of regulatory difficulties which face an employer, particularly a private company, wishing to establish an employee share plan.

Corporations Act
The Corporations Act regulates the offering of shares to employees. The divisions of the Act relating to fund raising and offering securities operate to require a prospectus or other form of disclosure to be provided before shares can be issued.  These disclosure documents must be very detailed and are very expensive to produce. There are also some forms of employee share plans which have the characteristics of a managed investment scheme which would normally require registration under the Act.

ASIC has provided relief in certain circumstances to listed public companies from these disclosure and registration requirements but this relief is not generally available to private companies.  See ASIC Policy Statement 49.
Private companies which wish to avoid these disclosure and registration requirements will need to ensure that any offering or plan falls outside these provisions.

Regard also needs to be given to the Financial Services Reform Act (“FSRA”) in relation to plans where a company holds shares in the employer on behalf of employees (which may be done to avoid the operation of the managed investment schemes provisions of the Corporations Act). In a custodial situation, the company holding the shares in the employer company would need to be licensed under the FSRA. This would normally not be a viable option.

Another important issue facing private companies is the need for the existing owners to maintain control of the company.  This, together with questions relating to what happens to the employee’s shares when employment ceases, needs to be addressed when a plan is being considered.

Whilst the government is keen to increase employee share ownership and there are generally recognised benefits in having employees’ interests aligned with the employer, there are a number of complex regulatory, taxation and private company issues which need to be considered before a plan is established.

For further information regarding employee share schemes, please contact Ian Smith.

This publication is intended only to provide a summary of the subject matter covered. It does not purport to be comprehensive or to render legal advice. The publication reflects the law at the date the publication was written which may differ at the date the publication is being read. No reader should act on the basis of any matter contained in this publication without first obtaining specific professional advice.
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