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Budget changes to Employee Share Ownership Plans – Good, Better, Best


Budget changes to Employee Share Ownership Plans – Good, Better, Best

By , May 12, 2021

Changes to the Employee Share Scheme rules announced overnight were specifically designed to “make it easier to offer Employee Share Schemes to provide more Australians with a share in the economic value they create through their hard work.”  This concept has had strong bi-partisan support over many years and the academic research on the impact of Employee ownership on productivity, profitability, sustainability and employee engagement are overwhelmingly positive.

We have seen a 400% (not 4% or 40% ) increase in enquiry and implementation of Employee Share Ownership Plans since Jan 2020 (pre-COVID) as employers looked to lock in key people, motivate those working from home and reduce risk. The research also shows that employees in employee-owned businesses retire with more wealth than their counterparts in non-employed owned businesses.

The budget mentions $500mil in tax incentive for employees who are shareholders – this is a huge incentive!

The changes cover three main areas:

Good – reducing the regulatory requirements for complex disclosure documents and associated legal and compliance issues, making implementation simpler and less onerous.

Better – removing the taxing point attached to when an employee leaves the business allowing employees to hold the shares and pay tax later. This may not work in many SMEs as the idea of an employee leaving (assumedly to work with a competitor or similar business) and still owning shares in the business is not popular and in fact many of our plans prevent this.

Best – extending the current $5,000 annual limit per employee on salary sacrifice (and loan/contribution type plans) to $30,000. This is substantial – the $5,000 limit was “supposed” to be changed in 2018 to $10,000, but this change allows employees to acquire a meaningful amount of equity in a tax-effective manner.

These changes (subject to the detail) will certainly encourage and increase the use of Employee Share Ownership Plans as a tool for Business Succession (right in the middle of the largest transfer of wealth in history) as many baby boomers head towards retirement. Many with a focus not just on financial harvest but also on looking after loyal employees and leaving a legacy.

In the same way, the research also shows employees earn more, stay longer, are more productive and far more engaged and “happier” at work, and retire with 40% more wealth. This combination produces a win-win-win-win outcome – a win for the business, the owners/shareholders, the employees, and the customers.

What’s missing – many of the submissions to the two major recent government enquiries (including our own) focus on two key areas:

  • The tax concessions are limited to each employee owning less than 10% of the equity in the business. In small businesses for example – a professional services firm with 4 or 5  key employees – each would necessarily own > 10% to transfer the company into employee ownership. This limitation and focus on broad based plans limit the utility of these plans for succession.
  • The taxation rules also favour broad based ESOP models (which are fine in some cases but do not always facilitate good succession outcomes) by requiring the plans be available to at least 75% of employees with greater than 3 years’ service. These are often not suitable in professional firms where ownership is typically focused on “key” employees.

If we can incorporate changes that address these key concerns, then the 400% increase will turn into a tidal wave.

Craig West

Craig West

Executive Chairman | Succession Plus

Craig West is a strategic accountant with over 20 years of experience advising business owners. His background as a CPA in public practice has provided invaluable experience in the key issues of concern to business owners.

In March 2014, Craig was appointed Executive Chairman of the SME Association of Australia, Australia’s largest small business organisation representing over 300,000 business owners.

In October 2014, he was awarded the Exit Planner of the Year at the Exit Planning Institute Annual Conference in Texas, USA, due to his innovative development of an exit planning process to help business owners maximise business value and achieve a successful exit.

Craig’s proprietary structure - a Peak Performance Trust - has won the Australia-wide award for the Employee Share Ownership Plan of the year twice in four years.

In November 2018, Craig launched SME Experts in partnership with Mark Bouris’ Mentored on Podcast One and quickly grew the monthly podcast audience to over 26,500 downloads; in October 2019, he released a new podcast focused on medium-sized businesses - Mid-Market Matters.

In July 2021, Craig joined the NSW Committee for STEP (Society of Trust & Estate Practitioners) – focusing on advising families across generations.

Craig has also launched a SaaS platform, Capitaliz (which captures the 21-step process), to assist other advisers internationally deliver advisory services at scale.

In November 2021, Craig was appointed Executive Chairman of NSW Leaders, a business mentoring group for leading NSW businesses.

In July 2022, Craig West received the award of Doctor of Business Administration for his research thesis titled “Examination of the key factors driving business exit options in Australian Small and Medium Enterprises.”

Craig is passionate about encouraging business owners to think strategically, maximise the value of their business and achieve a successful exit.

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