Employee Share Schemes (ESS) Explained
Employee Share Schemes (ESS) are known by many names and can be surrounded in acronyms – Employee Share Ownership Plans (ESOP) are the most common but they are also known as Employee Share Options plans (ESOP), Employee Savings Plans (ESP), Performance Rights Plan (PRP) and Executive Share Plans (ESP). No matter the name they are all put in place to achieve the same outcomes – attract, retain and motivate key employees, fund succession and retirement or founders/owners, provide a pathway for younger employees to take on equity and ultimately improve the performance, productivity and value of the business.
Equity plans have been used in start-ups for many years, mainly as a cash preservation/funding strategy, especially where the business was looking to employ someone they really cannot afford (at this stage of development anyway). Start-up share schemes often enable employees to earn less (salary sacrifice) income but earn equity instead. The government recognised this in 2015 and improved the Employee Share Scheme rules to make ESOP’s easier to implement, reduce the regulation and compliance burden, and improve the tax concessions.
Despite the name, Start-up Share Schemes can actually apply to a wide range of businesses. To qualify for a start-up ESS, the business needs to be less than 10 years old, not listed on any exchange, and turnover less than $50mil – many businesses who would not consider themselves start-ups would qualify.
As long as employees are Australian tax residents, hold less than 10% share in the business (each) and are not given more than 15% discount then they qualify for concessional tax treatment – they only pay capital gains on the shares when they sell or exit, no upfront tax and they can still use the normal CGT 50% discount as long as they hold the shares for at least 12 months.
The plans normally produce improvements in performance including productivity, employee retention, reduced sick days and increased employee engagement to list a few. Having employees think and act like business owners will change the way the business operates.