How Businesses Benefit from AU Employee Share Scheme

Authored by Anthony Bekker and Amit Majumder with the assistance of Casper Xiao

Australian tech businesses can now take advantage of recent changes to Employee Share Scheme (ESS) regulations. From July 2022, tax obligations for employees have been clarified, and employers' obligations have been eased. This allows tech start-ups to compete for the most talented employees in the global market.
Additionally, a new ESS regime has been introduced as of 1 October 2022, replacing ASIC's existing relief for employee incentive schemes. This has made it easier for companies to obtain relief and avoid complex disclosures and regulatory obligations under the previous regime.
Now is a great time to think about offering equity compensation for your company. Biztech Lawyers and Qapita welcome these recent changes and are already helping clients in Australia and around the world to take advantage of them and empower their employees through equity ownership.

What are Employee Share Schemes? 

Using equity to pay staff is done by several methods and known by different names such as Employee Ownership Scheme, Employee Share Purchase Plan, Employee Incentive Schemes, Participation Share Ownership Plan, and more. Most likely, you know them by these acronyms: Employee Share Option Plan (ESOP) or Employee Share Scheme (ESS). 

They incentivise or compensate employees with an ownership stake in the business instead of cash. This is useful for startups that often sacrifice cash flow in the early stages but compete with larger corporations that can offer higher salaries for top talent. 

An ESOP is a framework that allows employees to receive or buy shares in the company they work for. Not only does it attract, retain and motivate employees, but it also aligns their interests with those of the company, encouraging everyone to work towards the same goal.

Changes to tax 

Previously, the tax structures related to option vesting were complicated, and unwanted liabilities could result for employees. 

Previous Regime

Under the old regime, for tax deferred schemes,  the taxing point could have been triggered on termination of employment for both vested and unvested shares, rights or options. This means that if shares have not vested and the employee moves on, then the value of the unvested shares is taxable upon cessation of employment. As they are unvested, the employee is prevented from selling the shares to offset the tax liability. One viable workaround that was available under this old regime, was for companies to include the cash settlement discretion clause in the plan rules to make the awards considered as indeterminate rights. Even so, there were limitations, and the taxing point would still fall on the cessation of employment, though it would not have been triggered until such time as the awards were ultimately settled as equity. 

New Regime

Under the new regime, ‘Cessation’ of employment is no longer considered a deferred taxing point. The taxing point is no longer triggered by an employee leaving the company, even if the awards were made prior to this date. The taxing point, depending on plan design, is deferred until such events as exercise, sale, or end of restriction periods. 

Changes to Regulation 

As of 1 October 2022, timely regulatory changes have been introduced by the Commonwealth Government. The intention of the changes is to promote the post-COVID economic recovery while assisting companies with the retention of talent. 

The changes include:

• Increased flexibility for companies to allow independent contractors to participate in their ESS.          

• Exemptions for share schemes offered to directors and employees that do not require payment.

• Streamlined obligations for share schemes that do require payment, including loan share schemes.

• Raised the equity share ceiling for unlisted companies from $5,000 to $30,000 and $150,000 for unexercised options over 5 years, allowing greater flexibility in salary packages.

• Relief for unlisted companies offering ESS loan packages if they meet certain criteria.

• Relief for listed companies extending to shares new to the market and shares that have been suspended from trading.

• An unlimited issue cap can now be set by your company constitution (should you want to change it from the default cap for unlisted companies which is set at 20%)

What does this mean for you?

It’s now much easier to rollout ESS to your employees, and equity compensation strategy can now be a lot more flexible, as eligibility can be extended to contractors and casual employees. 

How Biztech Lawyers can help

The right legal advice is critical for technology companies that want to achieve the four business outcomes necessary for a successful ESS.

Firstly, it must be cost-effective. It’s no use establishing equity incentives if the price of establishing the scheme outweighs the amount of capital it deploys within the business over the long-term. The right tech startup lawyer will be able to strategise this for you.

Secondly, it has to adequately incentivise employees. An ESS isn’t a ‘nice to have’. Employees need to view it as a fundamental component of the incentive structure, on equal footing with the higher salaries competitors may offer, for it to effectively encourage them to align their values and goals with your business and to ‘go the extra mile’.

Thirdly, it must be legally enforceable. Many technology companies have employees based around the world. Employee share schemes are regulated by governments and must comply with local regulations. Pulling one off the internet that’s improper for where your employees are or for where your business is located could result in fines.

Fourthly, it cannot expose the business to undue risk. Lawyers for technology companies all have first-hand stories of takeover targets receiving a dream offer, only to have the whole saga held up because the company botched the ESS.

All of these business goals can be achieved by putting in place a thorough process that identifies the ideal cliff, vesting period, exercise rights and overall structure based on your business’s industry, situation and payroll. 

Biztech Lawyers can help you take advantage of the new changes and empower employee equity ownership in Australia and internationally. Contact us today

About QAPITA 

Qapita is a SaaS start-up company based in Singapore, Indonesia and India with a growing international presence in Australia and the South East Asia region. Qapita offers start-up companies an equity management software solution, which consists of a digital platform with workflows around Cap tables, Share Registry, ESS and ESOPs, due diligence and transaction records. Qapita also offers the design and implementation of ESOPs, in addition to valuation services. Qapita’s vision is to transform how equity is managed and traded in the private capital markets.

Qapita can help you design your equity compensation framework and roll out ESOPs , educate your employees on the rules of your scheme, and roll it to your employees digitally, while also engaging your investors. 

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