Everything you need to know about employee share scheme changes


Source: AAP Image/Dean Lewins

An overhaul to employee share scheme legislation is expected to be tabled in parliament this week, making it easier for startups to offer equity to staff members and reducing the tax burden for those employees.

Here’s what’s changing, and what it means for startups and the broader ecosystem.

What’s changing?

Primarily, the new rules will change the way employees are taxed on shares received under an ESS.

Employees will no longer become liable for taxation on their shares if they leave the business.

Currently employees have tax liability when they hit one of three points: when they leave the business; when restrictions on sale of shares are lifted; or 15 years from the date they were granted.

The new rules will remove the first taxation point, meaning employees will be taxed when they hit one of the other points, or through the capital gains tax regime when they sell their shares.

For unlisted companies that do not charge for shares, the value cap on shares offered to employees is also expected to increase from $5000 per employee, per year, to $30,000.

Other measures intended to reduce red tape for businesses include removing requirements under the Corporations Act 2001 for employees who do not pay to contribute in employee share schemes; relaxing disclosure requirements; and allowing unlisted companies to offer contribution plans, effectively allowing employees to purchase additional shares.

More information on the draft legislation is available here.

Which businesses do new employee share scheme rules apply to?

There are still some questions here.

The budget papers and draft legislation suggested that the new rules would apply to all ESS holdings issued on or after July 1, 2021.

However a report from The Australian Review suggests Treasurer Josh Frydenberg has said the changes will apply to all existing arrangements.

When were the changes announced?

Changes to the ESS regime were first announced in the Budget in May 2021.

In August 2021, a standing committee recommended significant changes to the regulation and taxation around employee share schemes, saying the current regime is “complicated and restrictive”.

Draft legislation was also released in August 2021.

What are the benefits of employee share schemes for startups?

Employee share schemes can come in handy for cash-strapped startups that struggle to compete with the salaries available at larger organisations.

But offering equity in a business can also lead to a more engaged workforce.

Proptech startup :Different, for example, offers employees a choice of packages, some weighted more towards equity and some towards salary.

“The best startup employees think and act like owners,” co-founder Ruwin Perera tells SmartCompany.

“The best way to encourage them to do so, is to make them owners.”

There could also be considerable payoffs for the employees themselves. When tech unicorn SafetyCulture raised $60 million in April 2020, half of that funding was directed to employees who wanted to cash in on their vested shares, effectively selling them back to the company.

The idea was to create a liquidity event for long-standing employees, without having to IPO. It meant some employees were able to pay off their mortgages, founder and chief Luke Anear told SmartCompany at the time.

“We’re talking hundreds of thousands of dollars for people, or even millions in some cases,” he said.

What are the benefits for the ecosystem?

Employee share schemes can also be good for the startup ecosystem more broadly.

While making it easier for employees to leave their roles may not seem, on the face of it, like a positive thing, it means they’re more likely to strike out on their own.

Many early employees of fast-growth startups such as Linktree and Atlassian have gone on to launch their own startups, or to become angel investors.

These changes mean more people will be able to do just that, without facing a hefty tax bill.

“Silicon Valley is built on employee equity,” Perera says.

He notes that LinkedIn, Yelp, Tesla, Youtube and many more were founded by former PayPal employees alone. Employee share schemes are a “great force multiplier”, leading to more startups and more jobs.

“If one former employee creates one more ‘Canva’, this scheme will pay for itself a thousand times over.”


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Toby Eggleston
Toby Eggleston
7 days ago

One important clarification:

The changes only apply to ESOPs that do not qualify for the startup concessions.

Cessation of employment has never been a taxing point for options that do qualify for the startup concessions