Under an Employee Share Scheme (ESS) provision, the government provides employers with a number of ways in which they can issue equity to their employees at a discounted rate.
For employees, there are many benefits to participating in an employee share scheme.
Similarly, as an employer, employee share schemes are just one way that you can both attract and retain high-performing staff to your growing business, without having to rely on highly competitive salaries alone.
Let’s take a look at the benefits of Employee Share Schemes and whether it might be a worthwhile strategy for your growing business.
Employee Share Scheme Benefit 1: Competing with Competitive Salaries
In order to build a great workplace with great products, your business must also have great talent. However, recruiting high-performing talent can come at a hefty price. In competitive industries with highly sought-after skills, the cost of employment can rapidly get out of hand for businesses – especially smaller businesses experiencing tighter cash flow as a result of ambitious growth plans.
Companies with high future value and limited access to immediate funding may often decide to offer an ESS to their employees. In this case, an ESS acts to compensate staff with future wealth, as a substitute for their current market wages. In simple terms, a higher market value of shares will result in a higher personal net wealth for employees.
Employee Share Scheme Benefit 2: Retaining Existing Talent
When Employee Share Schemes are linked to the length of tenure of an employee, a lock-up period can be put into place in order to prevent an employee from selling their owned shares, or receiving income, for a set amount of time.
In order to access the increased wealth, the employee must stay connected to the business for a period of time dictated by you, the employer. This ties your employees to your business for a certain period of time, which allows for better capacity and capability planning for the future of your business.
Employee Share Scheme Benefit 3: Shifting the Mindset of Your Staff From Employee to Business Owner
Holding a stake in the business can be used to encourage your staff to go beyond their daily tasks and pursue an active role in building the business. Employee Share Schemes can be issued based on key metrics for the business being reached by:
- The entire business as a whole
- An employee reaching key milestones in a defined period of time
This scenario can be considered as “Agency Costs”, with effective Employee Share Schemes working to help reduce agency costs significantly.
Employee Share Scheme Benefit 4: Enjoying the Advantages of Tax Concessions
$1,000 Up-Front Concession
Under the $1,000 up-front concession, the amount treated as taxable income can be reduced by up to $1,000. The discount on a share, or the right to acquire shares, under an ESS is generally included in the employee’s assessable income.
Start-Up Concessions
Instead of the discount being included in the employee’s assessable income, any future increase in the value of the share will be taxed as a capital gain once the share is disposed of. If the share has been held for a minimum of 12 months, a 50% CGT relief is available.
This concession enables start-ups and high-growth business owners to set aside more cash in order to continue growing their businesses. The intention of the start-up concession is to help make Australia’s tax arrangement more attractive to innovative start-ups. It is important to note that companies that are eligible to receive start-up concessions cannot access the $1,000 up-front concession.
Tax-Deferred Arrangements
When a business is not eligible to receive start-up concessions, business owners may still be able to provide their employees with tax-deferred securities. It is important to note that discounts to market value are not treated as assessable income until there is certainty that the employee will receive the options or shares – such as a lock-up period.
Tax-deferred arrangements help to avoid unintended consequences where an employee is provided shares (or options), and receives a tax-bill without the cash flow to make the payment up front, despite holding shares or options of values.
Is an Employee Share Scheme Right for You and Your Business?
For more information about Employee Share Schemes, you might like to download our BlueRock Guide to Employee Share Schemes .
To further discuss the implementation of an Employee Share Scheme in your workplace, or to talk through the benefits that Employee Share Schemes can have on your business and your employees, get in touch with our team of Melbourne-based accountants for a no-obligation chat.
