Small business start up concessions for ESS
Employee share schemes (ESS) are a way for employers to provide shares or rights to their employees as part of their remuneration package. The Australian Taxation Office (ATO) provides tax concessions for employee share schemes under specific conditions. Probably the most significant change from 1 July 2015 was the introduction of specific concessions for ESS interests issued to employees of small start-up companies. If the relevant conditions can be satisfied then any discount provided to the employee is basically ignored for income tax purposes.
Conditions for the scheme:
In order for the small start-up company concession to apply the general conditions that apply to all concessions under the ESS rules must be met. These are summarised below:
- The shares or rights must be in the employer or a holding company of the employer;
- The shares or rights must relate to ordinary shares;
- The employer must not be a share trading company; and
- The shares or rights provided must not result in the employee owning more than 10% of the shares in the employer or the employee controlling more than 10% of the maximum voting rights.
There are various additional conditions that the company and the ESS interest that must satisfy
If the conditions for the small start-up company concessions under the Employee Share Scheme (ESS) can be satisfied, the employee will not need to include the discount they have received in relation to the shares or rights in their assessable income. This means that any discount provided to the employee is basically ignored for income tax purposes.
If the ESS interests are shares in a company, the discount is not generally taxed on revenue account to the employee and will be subject to the Capital Gains Tax (CGT) provisions. The first element of the cost base of the shares will be their market value when they were acquired, so the employee will receive full market value cost base for the shares even if they have been acquired at a discount to their market value.
If the ESS interests are rights to acquire shares, then the discount is not subject to taxation on revenue account, and the rights will be subject to the CGT provisions. The first element of the cost base of the rights will be the employee’s cost of acquiring the rights. No CGT liability will arise if the rights are exercised, although the cost base of the underlying shares will include any amount paid to exercise the rights.
There is another concession that will be available to shares acquired upon exercising rights in a small start-up company where the conditions above have been met. The CGT discount holding period will be treated as starting from when the rights were acquired rather than when the underlying shares were acquired. This will improve access to the CGT discount when the shares are sold within 12 months of the rights being exercised.
There are some additional considerations for employers looking to establish an ESS and take advantage of the small start-up company concessions:
- Reporting Requirements: Employers must notify the ATO of any ESS interests provided to employees within 14 days of the end of the financial year in which the ESS interests were granted. Employers are also required to report on any subsequent changes to the ESS interests, such as when they are sold or when any restrictions on the shares or rights lapse.
- Documentation: Employers must have a written ESS plan in place that sets out the terms and conditions of the scheme, including the eligibility criteria and any vesting requirements.
- Valuation: Employers must ensure that the shares or rights are valued appropriately for tax purposes. This will typically involve obtaining a professional valuation, which may need to be updated periodically.
- Employee Education: Employers should ensure that employees understand the tax implications of participating in an ESS. This may involve providing employees with education or advice from a qualified professional.
The small start-up company concessions for ESS interests can provide significant benefits for both employers and employees. However, it is important to ensure that the conditions for the concessions are met, and that appropriate documentation and reporting is in place. If you are considering implementing an ESS for your small start-up company, it is recommended that you seek advice from a qualified professional.
Please contact Bates Cosgrave on 02 9957 4033 for more information about the ESS start up concessions.