Employee Equity Incentives Update

A suit of legislative changes to Australia’s employee incentive framework will be ushered in during the first few months of the new financial year. These changes represent a significant change to Australia’s ESOP regime and will provide listed and unlisted entities with enhanced freedom to implement their employee benefit schemes. Below is an overview of the incoming changes.

Tax

Key Changes

• The cessation of employment will no longer be considered a tax trigger point under Australia’s tax-deferred ESOP regime with effect from 1 July 2022¹. The removal of this tax trigger point means that ESOP participants with interests in new or existing tax-deferred employee share schemes should only be subject to tax on the earlier of:

• when their awards vest and those shares are not subject to any disposal restrictions;
• when they have exercised their options and the resulting shares are not subject to disposal restrictions; or
• 15 years after they were granted their award.

• Unlisted entities are set to benefit from the simplification of Australia’s tax residency rules and the revised ESOP framework provides for equal tax treatment of shares and options issued by Australian and overseas companies.

Purpose and rationale

• Taxation at the point of termination has long been considered an impediment to industry mobility, particularly among employees at competitive start-ups and tech venture firms.
• In the past, the alternate tax treatment of local and foreign-issued options has created an incentive for entities to re-domicile in the U.S. It is now hoped that the implementation of uniform tax treatment will help keep local talent in Australia.

Equity grants by unlisted entities

Key Changes

• A host of changes designed to benefit unlisted entities are to come into effect from 1 October 2022 including:

• removal of the monetary cap on equity grants if the employee is not required to make payment or borrow funds to participate; and
• for grants under which an employee is required to make payment or borrow funds to participate, increasing the annual monetary cap from AUD5,000 to AUD30,000. Under the current regime, the value of equity offers to employees is capped at AUD5,000 per person per year. Moving forward the cap will be a AUD30,000 per year (plus 70% of dividends and cash bonuses) until the entity becomes listed or reaches a liquidity event. The cap can be accrued to unexercised options over a 5 year period, up to a maximum of AUD150,000.

Purpose and Rationale

• The equity cap has been raised to assist in levelling the playing field between listed and unlisted bodies, allowing for unlisted entities to attract and retain talent using equity rewards on par with listed companies.
• The changes will likely facilitate broader employee equity plan adoption across Australia, particularly amongst tech players and industry start-ups which are heavily reliant on stock and option issuances as part of overall remuneration packages.

Equity grants by listed entities

Key Changes

• From 1 October 2022, shares will no longer need to have been listed for more than 3 months or suspended from trading for 5 days or less over the previous 12 months before an offer is made.

Purpose and Rationale

• The change will increase the number of companies who can make incentive offers to employees and will particularly benefit unlisted companies intending to grant equity awards as part of an IPO (previously unlisted entities would have had to wait 3 months after listing before making an offer in reliance on ASIC Class Order 14/1000).

Equity grants by unlisted and listed entities

Key Changes

• From 1 October 2022 a Notice of Reliance will no longer have to be submitted to ASIC in relation to awards which require no payment by employees.
• From 1 October 2022 statutory relief from the disclosure requirements in Part 6D.2 of the Corporations Act will also be available, such that a prospectus or offer information statement will not need to be provided in connection with eligible scheme offers in circumstances where no payment is required from participants (streamlined disclosure requirements will still apply to schemes involving payment from participants).

Purpose and Rationale

• The removal of the requirement to file a Notice of Reliance will reduce the administration involved in establishing an employee incentive scheme.

• It is envisaged that the provision of relief from the disclosure requirements in Part 6D.2 of the Corporations Act will lessen the regulatory burden on start-ups and unlisted entities more generally in particular.