If you aren’t using an equity-based reward mechanism yet, you’ll lose employees to competitors who are. A good salary is no longer enough to maximise staff retention. Here’s how an EST (Employee Share Trust) could help.
The following information is general and should not be considered financial, legal or taxation advice specific to your situation.
Understanding Employee Share Trusts
Employee Share Trusts (EST) are a special type of employee share scheme (ESS) designed to align employees’ interests with the company’s success. Used properly, an employee’s ESS interest can form a solid strategic foundation to attract the industry’s best, plus retain and motivate your key people.
The EST structure provides a streamlined mechanism for allocating shares or rights as part of an employee’s remuneration package. The tax benefits associated with ESTs can be significant, offering tax concessions that make these schemes attractive for companies looking to enhance their compensation strategies by providing a beneficial interest in the employer company.
An EST can be wildly beneficial for both employer companies and employees. However, employer companies must ensure that their EST is established and operated in strict accordance with relevant tax laws and regulations.
According to the Income Tax Assessment Act 1997, an EST must meet specific criteria outlined in subsection 130-85(4). Such trusts are exclusively involved in obtaining, holding, and providing shares or rights under an ESS for the benefit of employees.
Non-compliance can lead to adverse tax implications, undermining the benefits that a trust is designed to provide. Therefore, understanding the legal framework and seeking expertise on maintaining compliance is essential for leveraging the full potential of ESTs.
Unlocking the Benefits of Employee Share Trusts: A Deep Dive into the Peak Performance Trust
Employee share trusts and ownership trusts have become popular mechanisms for companies looking to align their employees’ interests with the business’s overall success. An employee ownership trust (EOT) is another vehicle that facilitates employee ownership of companies, potentially providing tax relief and financial benefits for employees. One example is the Peak Performance Trust (PPT), launched in Australia in 2006.
Here, we’ll explore the numerous advantages of an employee share trust like the PPT and why it has grown in popularity as an optimal structure for employee ownership.
Alignment of Interests
A primary benefit of an employee share trust is the alignment of interests between employees and the company. By tying ownership to performance, employees have a direct stake in the company’s success and are motivated to contribute to its growth. This alignment fosters a sense of ownership and responsibility among employees, encouraging them to think and act like business owners.
Shared interests help build a thriving, collaborative culture, with employees motivated to contribute to a common goal. This alignment of interests fosters a sense of shared purpose and accountability, driving employees to perform at their best. It further helps to foster a positive work environment where employees feel valued and recognised for their contributions.
Using an Employee Share Scheme to Compete for Talent
In today’s competitive job market, attracting and retaining top talent is more challenging than ever. One approach that companies are increasingly adopting is an employee share scheme.
Companies are constantly seeking innovative ways to stand out and offer compelling value propositions to potential employees. Employee share plans provide financial incentives and foster a sense of ownership and loyalty among employees. An employee share plan can help companies compete for talent and create a motivated and engaged workforce.
Creating a Competitive Remuneration Package
An employee share plan is a low-cost way to enhance the overall remuneration package. Traditional salary packages may not always be sufficient to attract top talent, especially in industries where competition for skilled workers is fierce. By incorporating a share plan, companies can offer employees the opportunity to acquire equity in the business, providing them with a stake in the company’s success. This long-term equity component can be more attractive than a higher upfront salary alone, as it aligns the interests of employees with the growth and profitability of the company.
Fostering a Culture of Ownership through Employee Ownership Trusts
Employee share plans promote a culture of ownership within the organisation. Participating employees with a financial stake in the company are more likely to think and act like business owners. This ownership mindset drives innovation, productivity, and long-term sustainability. Employees become more engaged and committed to their work, knowing their efforts directly contribute to the company’s success. This sense of ownership can also improve collaboration and teamwork, as employees work together towards common goals.
Enhancing Employee Retention
High employee turnover can be costly and disruptive to business operations, so retaining top talent is just as important as attracting it. Employee share plans can significantly enhance employee retention by providing long-term incentives that encourage employees to stay with the company. The opportunity to accumulate ‘savings’ through acquiring and holding shares and the potential for capital gains and dividend payments creates a compelling reason for employees to remain loyal to the organisation. This stability and continuity are crucial for maintaining a skilled and experienced workforce.
Providing a Succession Planning Tool
Employee share plans can be an effective succession planning tool for business owners. By gradually transferring ownership to employees, companies can ensure a smooth leadership transition and preserve the company’s legacy and independence. This approach provides a clear exit strategy for business owners and empowers employees to take on leadership roles and contribute to the company’s long-term success.
Tax Benefits and Capital Gains Tax
Employee share plans offer significant taxation benefits and tax concessions that can be highly advantageous for both the employer company and employees. Understanding these benefits can help companies maximise the value of their employee share schemes and ensure compliance with relevant tax regulations.
Tax-exempt shares
Where a typical monetary bonus or commission is generally taxed at the marginal rate, employee share plans can provide tax-free shares to employees. Under the ESS rules, employers can offer up to $1,000 worth of tax-free shares per employee per annum. This provision allows employees to receive shares without incurring any immediate tax liability, making it an attractive incentive for participation in the share plan.
Salary Sacrifice
Another key tax advantage is the salary sacrifice arrangement. Participating employees can choose to salary sacrifice up to $5,000 worth of shares per annum into a qualifying employee share ownership plan (ESOP). This arrangement allows employees to reduce their taxable income, thereby lowering their overall tax payable. Additionally, the salary sacrifice contributions can be used to purchase additional units in the PPT, further enhancing the employee’s ownership stake in the company.
The tax implications of employee share plans are governed by the Income Tax Assessment Act 1997 (ITAA 1997). Contributions made by the employer to the employee share trust are generally tax-deductible, providing a significant tax saving for the company. This deduction can help offset the cost of establishing and maintaining the share plan, making it a cost-effective strategy for employee compensation.
Tax deferral for employees
Furthermore, employees may benefit from tax deferrals on their share-based payments. Under certain conditions, the taxation of shares acquired through an employee share plan can be deferred until a later date, such as when the shares are sold or when the employee leaves the company. This deferral can provide employees with greater flexibility in managing their tax liabilities and can result in substantial tax savings over time.
Employee share plans must also comply with regulatory requirements, such as the Corporations Act 2001 and the ITAA 1997. Proper trust establishment and maintenance are essential to ensure compliance and avoid potential legal issues. This compliance not only protects the company but also provides employees with confidence in the trust’s legitimacy and stability.
In summary, the taxation benefits and tax concessions associated with employee ownership like the Peak Performance Trust can provide significant advantages for the founders, the employer company and employees. Before offering the options of tax-free shares, salary sacrifice arrangements, and tax deferrals, companies should carefully consider these benefits and ensure compliance with all relevant regulations to maximise the value of their employee share schemes.
Tax Implications for Employer Companies
Establishing an Employee Share Trust (EST) comes with specific tax implications that employer companies must carefully navigate. When correctly established and operated, an EST can offer substantial tax concessions, including capital gains tax (CGT) and fringe benefits tax (FBT) concessions.
For employer companies, these tax concessions can translate into significant financial benefits. For instance, contributions to the EST may be tax-deductible, reducing the overall tax burden on the company. Additionally, the potential for CGT concessions means that any capital gains realised from the shares held within the trust may be taxed at a lower rate, providing further financial relief.
However, the benefits are contingent on strict compliance with the legal definition and operational guidelines of an EST. Failure to meet these requirements can result in the loss of fringe benefits tax concessions and expose the company to potential penalties. This underscores the importance of meticulous planning and adherence to regulatory standards when establishing and managing an EST.
Compliance and Risks
Compliance with tax laws and regulations is paramount when establishing and operating an Employee Share Trust (EST). The Australian Taxation Office (ATO) provides guidelines on the tax treatment of ESTs, and it is essential for employer companies to ensure that their trusts meet the definition set forth in subsection 130-85(4) of the Income Tax Assessment Act 1997.
Opening and managing bank accounts is essential for trustees to operate these plans effectively and ensure compliance with relevant regulations.
It’s also worth noting that borrowing money can be a necessary activity to fund the purchase of shares or rights in the employer company, provided that the loan adheres to specific guidelines regarding security and interest rates.
Another critical aspect to consider is the provision of financial assistance to employees through an EST. This assistance, which may include mainly cash payments or other forms of support, must comply with Fringe Benefits Tax (FBT) rules. Providing beneficial interests in shares has a specific exclusion from FBT. Failure to adhere to these rules can result in significant tax liabilities for the employer company.
Given the complexities and potential risks, it is highly advisable for employer companies to seek professional advice from an employee ownership expert. Doing so will help ensure that the EST is compliant with all relevant tax laws and regulations; maximising the benefits while minimising risks.
Compliance and Regulatory Considerations
The Corporations Act 2001 plays a crucial role in governing employee share plans in Australia. This legislation ensures that companies offering shares to their employees comply with specific legal and regulatory requirements, thereby protecting both the company and its employees.
One key aspect of the Corporations Act 2001 is the requirement for disclosure. When a company makes an offer of shares under an employee share plan, it must provide the employee with a disclosure document (unless an exemption applies). The disclosure document contains essential information about the share plan, including the terms and conditions, the rights and obligations of the participants, and any potential risks involved. The disclosure requirement ensures that employees are fully informed before making a decision to participate in the share plan.
There are several exemptions to the disclosure requirement under the Corporations Act 2001. For example, offers made to senior managers or small-scale offers (up to 20 persons not exceeding $2-million in any 12-month period) may be exempt from providing a disclosure document. Additionally, companies can rely on relief provided by the Australian Securities and Investments Commission (ASIC) Class Order [CO 14/1001], which offers specific exemptions for employee incentive schemes for unlisted bodies.
The Corporations Act 2001 also outlines the responsibilities of the company’s board of directors in relation to employee share plans. The board must ensure that the share plan is established and maintained in compliance with the law and that it operates in the best interests of the company and its employees. This includes ensuring that the plan is properly documented, that all necessary approvals are obtained, and that the plan is regularly reviewed and updated as needed.
Employee share plans must also comply with the Income Tax Assessment Act 1997 (ITAA 1997). This legislation governs the tax implications of employee share plans, including the tax treatment of shares acquired by employees and the tax deductions available to employers.
Compliance with the Corporations Act 2001 and the ITAA 1997 is essential to ensure that the share plan operates smoothly and provides the intended benefits to both the company and its employees. By adhering to these regulations, companies can create effective and compliant share plans that align employees’ interests with the business’s success while also providing valuable tax benefits and incentives.
Conclusion: Best Practices for Employer Companies
To maximise the benefits of an employee share trust, employer companies should carefully consider the tax implications and regulatory requirements, ensuring the trust is properly established and maintained, and communicating clearly with employees about the benefits and risks of participating in the trust. Regular reviews of the trust are also essential to ensure it continues to meet its objectives and provides value to both the company and its employees.
Employee share trusts like the Peak Performance Trust offer numerous benefits, including alignment of interests, attracting and retaining talent, tax benefits, enhanced employee engagement, and compliance with regulatory requirements. By implementing best practices and maintaining clear communication with employees, companies can unlock the full potential of these trusts and create a more motivated, engaged, and loyal workforce.
Using a share plan to compete for talent offers numerous benefits for both employers and employees. By creating a competitive remuneration package, fostering a culture of ownership, enhancing employee retention, aligning interests and goals, and providing a succession planning tool, companies can attract and retain top talent in today’s competitive job market. Implementing an employee share plan is a strategic investment that can lead to a motivated, engaged, and loyal workforce, ultimately driving the company’s growth and success.
Find out how an employee share trust could benefit your business and your employees and your retirement plan by booking a consultation with your Succession Plus advisor today.
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