Is an employee share scheme (ESS) your best business move?

Attract and keep top talent in 2024

An innovative incentive

Attracting and retaining top talent is challenging amid post-pandemic market shifts, a low unemployment rate, and the rise of remote work. Companies are offering benefits like flexibility, remote work options, extra annual leave and higher wages.

An employee share scheme (ESS) could be the answer for cash-poor businesses that are hungry for growth.

ESSs can be complex. It pays to be clear on your business objective and get professional advice to ensure informed financial and taxation strategies.

Is your business eligible to offer an ESS?

To be eligible, your business must:

  • be an Australian company with at least one director who is an Australian resident
  • not be listed on a stock exchange
  • have an aggregated annual turnover of less than $50m
  • be less than 10 years old
  • hold the options of shares for at least three years
  • ensure no employee holds more than 10% of the company.

Businesses must also meet a range of legislative obligations across disclosure, licensing, advertising, hawking, the on-sale of financial products, and annual reporting.

How do you give your employees shares?

Shares can either be given to employees as a performance bonus or as remuneration instead of a higher salary or bought at a discounted rate via:

  • salary sacrifice over a set period
  •  dividends received on shares
  •  a loan from the employer
  •  full payment upfront.

Why offer shares to your employees?

ESSs deliver some compelling business benefits, including:

  • Attract and retain talent in competitive spaces – by offering shares, you offer something more than a simple paycheck. Attract top talent with the opportunity to build their personal wealth and encourage them to stick around by involving them in the ownership and future success of your business.        
  • Motivate improved performance – give employees a genuine and measurable stake in your business, and they’ll be motivated to work more productively and achieve better results.

Reward employee performance and loyalty – for start-up businesses especially, ESSs provide an alternative way to reward employees when the business is cash poor.

  • Enjoy tax and financial benefits – businesses may be entitled to a company tax deduction where shares are purchased on market or if a tax-exempt plan is used. Both new issue shares and shares purchased on market are deductible up to the $1,000 limit per employee, per financial year. The regular payroll deductions from participating employees also provide a steady cash flow for your business – a good point to share with your CFO when making the case for an ESS.        
  • Share the burden and discover new opportunities – turning employees into shareholders can lessen the burden business owners feel when running everything solo. Not only does dispersing responsibility for decisions lighten the load, but it also invites new perspectives, ideas and innovations that could unlock a new level of growth.

ESS & Capital Gains Tax (CGT)

When employees sell or dispose of their shares or rights, there may be CGT implications, so it’s wise to ensure they are informed before accepting an ESS.
In most cases, ESS interests are exempt from CGT implications until the discount on the ESS interest has been taxed.

For an ESS interest that is taxed upfront, the interest is taken to have been acquired for its market value on the date of acquisition.

For an ESS interest for which tax is deferred, the ESS interest (and the share or right that it forms part of) is taken to have been re-acquired immediately after the deferred taxing point. This resets the cost base of the ESS interest to its market value at this time and resets the acquisition date, which will be relevant to eligibility for the 50% CGT discount.

For ESS interests eligible for the start-up concession, the discount on those interests will not be included in income. However, under the CGT rules, the ESS interests or resulting shares will be taxed when sold or transferred.

Pros and cons of ESSs for employees

Enticing employees with an ESS means highlighting the pros while ensuring awareness of potential cons.

  •  Provides an opportunity to secure shares for those who may lack the means to purchase shares upfront in traditional schemes
  • Access shares at a discounted rate (or for Avoid brokerage fees
  •  Benefit financially if the business performs well
  • Enjoy potential tax benefits, depending on the features of the ESS
  • Potentially complex tax implications like CGT and FBT
  • Potential limitations on when shares can be bought and sold (e.g. shares may have to be paid off before they can be sold)
  • Performance targets may have to be met to retain shares
  • Shares may have to be given back or sold if an employee chooses to leave the business 
  • Risk of losing money if shares drop in value or the company goes out of business

Grow together with an ESS

An ESS can be a powerful business move – growing your business and building employee wealth. Maximise the opportunities and stay on top of financial and taxation complexities with business advisory and HR consulting support.

Ask our experts if an ESS could benefit your business. 

Ask for a callback from JTU Accounting.