New rules for employee share schemes: a guide for start-ups

The treatment of employee share schemes in Australia has been a recurring problem for start-ups, particularly technology companies in the early-stage that use equity as a way to attract and retain top talent before the business can afford to pay market salaries.

The long-awaited changes announced by the government go a long way towards solving the problem, which meant employees were taxed at the point of issue on share options rather than when the options were exercised. It's not very attractive for the employee if they are forced to pay tax on something that may have never reached its proposed value.

A recent start-up survey, conducted by LawPath, reported that only one in 10 companies had an employee share scheme in place. According to more than 90 per cent of the start-ups, the high cost and complexity are the main reasons for not having an employee share scheme. Eight out of 10 start-ups said they would put in place an employee stock ownership plan if the tax and cost implications were lowered.

Under the new scheme that will be in force from July 2015, there will be no up-front taxation. Companies of all sizes can now move to give employees options after having been stymied by the tax regime since 2009.

Foreign companies (especially US tech companies) will be extremely pleased as it will now be easier for them to extend their employee share regimes to Australian employees. Previously Australian employees of multinationals would miss out as it was often too difficult for the foreign employer to localise their schemes in a tax-effective way.

Start-ups will be given further concessions in an attempt to boost the Australian innovation sector. Companies that have an aggregate turnover of less than $50 million are unlisted and have been incorporated for less than 10 years will be given further financial concessions.

Eligible start-ups will be allowed to issue shares to employees at a small discount (up to 15 per cent) and issue options under advantageous conditions. Shares and options that were allocated at a discount will also not be subject to up-front taxation, as long as they are held by the employee for a minimum of three years.

Start-ups also benefit by having their gains on the options taxed as capital gain and not income, therefore are taxed at the lower concessional tax rate.

The government will extend the maximum time for tax deferral of seven years from acquisitions of interests to 15 years, allowing more time for the start-up to succeed.

The reforms cannot come quickly enough for struggling start-ups that are losing talent to international companies and larger, cashed-up competitors. These changes are a step in the right direction to making Australia a competitive early-stage economy.

The new scheme will enable companies to do without complex synthetic loan plans currently used and establish an employee stock ownership plan with a simple employee option agreement. Legal and tax costs will be heavily reduced as there are no tax implications at the outset.

Huge demands for "off-the-shelf" employee stock ownership plans are expected. The government has announced that it will work closely with the industry to develop standardised documentation that will streamline the process of establishing and maintaining an employee share scheme.

What does this mean for start-ups? Early-stage businesses will now be able to attract talent and keep hold of employees by paying them with equity opposed to vital capital that is needed to grow the business. The new employee stock ownership plan rules will enable young Australian companies to offer a portion of their business to match the generous salaries offered by well-funded international companies, which are seeking the same talent.

To get a head start on planning how you can benefit from the new employee share scheme rules to help your start-up, contact us now on 02 9299 7044 or send us an email at

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