Employee Share Scheme Tax Treatment for Startups
Updated: August 2021 – Succession Plus CEO, Craig West, has reviewed the impact and effectiveness of the House of Representatives 2021 inquiry into the taxation treatment of Employee Share Schemes (ESS). The report titled; Owning a Share of Your Work: Tax Treatment of Employee Share Schemes, details 2 roadmaps, and 18 recommendations which are a massive step forward in encouraging the use of employee ownership by small-to-medium businesses. To find out more about these recommendations – read Craig West’s response here.
Employee Share Schemes, Employee Share Ownership Plans (ESOP), and several other forms of Employee Ownership all offer one key benefit – they give employees access to ownership of the business they work for, far better-aligning employees and owners to focus on and benefit from joint business goals. Having employees think and act like business owners can make a substantial difference in the financial performance of the business. The academic research on ESOPs is very clear, employee ownership improves productivity, profitability, employee retention, engagement, and satisfaction – all of which can make a more valuable and successful business.
Governments around the world, including here in Australia, recognise this and have often made several changes to the law surrounding employee share ownership plans. The most recent changes to the taxation concessions attached to these plans were made in 2015. But in 2020 the government has run two separate inquiries to look to improve the utilisation and treatment of employee share ownership plans.
As a large provider in this area, we have made submissions to both inquiries outlining suggested changes to the rules to make employee share plans even more attractive to business owners.
Tax Treatment of start-up Employee Share Schemes
If your business can complete the nine requirements to qualify as a start-up under the ESS rules, then the taxation concessions are in fact very generous – upfront taxation is no longer applied and employees only text (under capital gains tax) at the time the shares are sold. In order to meet the test, you must satisfy the following rules:
- Not listed on a public exchange
- Aggregated turnover less than $50m
- Less than 10 years old
- Australian resident taxpayer
- Less than 10% of shares (and voting rights)
- Employed by holding company or subsidiary
- Less than 15% discount
- Hold for more than 3 years
- Available to 75% of employees with more than 3 years’ service