Employee Share Schemes: ED

In relation to the changes that will apply to ESOPs generally:

• tax will be deferred for qualifying options until exercise and there are no longer any genuine sale restrictions;
• to qualify for deferral:

- options will no longer be required to be subject to a ‘real risk of forfeiture’ at grant; and

- an employee may hold up to 10% of the ownership interests in the employer, up from the 5% maximum currently. 

• the maximum deferral period will be extended from 7 to 15 years from grant; and
• the valuation tables for calculating the market value of options have been revised, with a some significant reductions as compared to the current tables. 

In relation to start-ups, the new concessions provide an exemption from tax for a discount of up to 15% on grant of shares and that any gain on options will be taxed as a capital gain rather than as income. To qualify as a start-up the company must:

• not be listed
• have been incorporated within 10 years from the year of grant, and not be a member of a group where a company has been incorporated for longer than 10 years; and
• have an aggregate group turnover of less than $50m in the income year before the grant.

Broadly, the group will include any ‘body corporate’ that owns more than 50% of the shares in the ‘start-up’ and any of that shareholder’s majority owned entities. Consequently, if a start-up has a VCLP or ESVCLP as a majority investor, then the age and turnover of the VCLP/ESVCLP and all of its majority owned investments will be taken into account in determining whether the start-up company meets these requirements. 

For the shares or options to qualify for this concession:

• the shares can only be issued at a discount of a maximum of 15%;
• the exercise price of the options must be at least equal to the market value of the shares at the date of grant;
• the options/shares must not be able to be sold within 3 years. This will be problem for any company where the shareholders have ‘drag along rights’ enabling them to force a sale of the employee’s shares or options where the company is to be sold; and
• the company must have a broad based option or share plan available in the prior 3 years to 75% of all permanent employees.

There are several other welcome changes, including allowing the Commissioner to provide valuation safe harbours and improving the refund provisions for lapsed options.

Submissions close on Friday, 6 February. For further information please contact Toby Eggleston, Tel: +61 3 9288 1454, Email: Toby.Eggleston@greenwoods.com.au.

Freehills Patent Attorneys is associated with Herbert Smith Freehills Pty Ltd. This article was first published on the Greenwoods and Herbert Smith Freehills website.