Employee share schemes just got easier

In response to the Consultation Paper Employee incentive schemes (CP 218) issued by Australian Securities and Investments Commission (ASIC) in November 2013, ASIC has released an updated regulatory guide and two new class orders on employee incentive schemes.

The Consultation Paper review process related to exemptions for employee incentive schemes from certain disclosure, licensing and other requirements under the Corporations Act. The review was in response to the increasing number of case-by-case exemptions in situations not covered under its existing class orders as well as keeping up with various legislative changes and market developments. ASIC Commissioner John Price stated, ‘The objective of the review was to put forward proposals that further reduce business costs, and enhance the efficiency and development of the economy, whilst at the same time ensuring that participants of employee incentive schemes remain confident and informed about what they are offered.’

Employee incentive schemes are designed to align the interest of both parties by offering a long-term mutual ownership interest, improving business performance and employee commitment. The new class orders (Class order 14/1000 Employee incentive schemes: Listed bodies and Class Order 14/1001 Employee incentive schemes: Unlisted bodies) aim to offer greater flexibility for the schemes by facilitating the offer of a range of financial products under employee incentive schemes; broadening the classes of people who can participate; increasing the options of structures used for incentive schemes; and reducing some of the administrative requirements.

The new class orders offer new improvements and some new requirements. For example the new orders allow entities to offer equity interests to employees, contractors, casual employees and prospective participants without the need for a prospectus where other circumstances for the need for a prospectus do not apply; however, the new policy exemptions are not unconditional and among other additional requirements, certain disclosure obligations and limits apply.

It should be noted that ASIC’s broadening of the policy does not affect the case-by-case exceptions that may be granted where an employer does not fall within the class order relief or existing exemptions under the Corporations Act, nor does it affect the fundamental principles of employee share schemes, that is to require:

  • the terms of the employee incentive scheme to support the long-term mutual interdependence between employer and employee
  • that employees have adequate information to assess the value of what they are being offered and to understand the terms and conditions, and
  • the employee incentive scheme is not being offered for fundraising purposes.

In addition, the government’s recent announcement in October 2014 on taxation arrangements for employee share schemes noted that there will be no up-front taxation on share options at the point of issue. For most companies, the tax treatment for shares and options provided to employees will be similar to the pre-1 July 2009 rules. Start-ups will be given further concessions — companies that have an aggregate turnover of less than $50 million, are unlisted and have been incorporated for less than ten years will be also given further financial concessions. Start-ups also benefit by having their gains on the options taxed as capital gain and not income, so are therefore taxed at the lower concessional tax rate. The government will extend the maximum time for tax deferral of seven years from acquisition of interests to 15 years, allowing more time for the start-up to succeed. The new scheme comes into force in July 2015.

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