Employee incentive schemes - ASIC widens exemptions and Government proposes taxation changes

Corporate eBulletin - 31 October 2014

Summary

ASIC has released an updated regulatory guide and two new class orders (one for listed bodies and one for unlisted bodies) that widen the exemptions from certain provisions of the Corporations Act 2001 (Cth) for employee incentive schemes.

The changes will better facilitate the ability for companies to offer employee incentive schemes. They are aimed at reducing the compliance burden for companies, while at the same time ensuring participants in employee incentive schemes are adequately informed about what they are being offered.

The Federal Government has also proposed changes to the taxation of employee incentive schemes in its 14 October 2014 National Industry Investment and Competitiveness Agenda. The changes are aimed at encouraging employee share ownership and entrepreneurship and, if passed into law, will take effect from 1 July 2015.

These changes will complement ASIC's updated policy in relation to share incentive schemes by helping to minimise the costs and complexity for companies of implementing and maintaining incentive schemes.

In this eBulletin, we outline the changes to ASIC's employee incentive scheme policy and the Federal Government's proposed changes to the taxation of employee incentive schemes.

A printable summary of the updated regime, including these key changes, is detailed in this PDF.

 

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ASIC updated regulatory guide and new class orders

In November 2013, the Australian Securities and Investments Commission (ASIC) released a consultation paper, together with a draft updated Regulatory Guide 49, relating to exemptions for employee incentive schemes from certain disclosure, licensing and other requirements under the Corporations Act 2001 (Cth).

The purpose of the consultation was to revisit ASIC's policy and the scope of its class order exemptions in relation to employee incentive schemes. This was in response to an increasing number of case-by-case exemptions provided by ASIC in situations not covered by its existing Class Order 03/184 Employee share schemes, as well as to keep up with legislative changes and developments in market practice for structuring employee share schemes.

Following the end of the consultation process, ASIC today announced the release of two new class orders (Class Order 14/1000 Employee incentive schemes: Listed bodies and Class Order 14/1001 Employee incentive schemes: Unlisted bodies) and updated Regulatory Guide 49, which has widened the scope of the exemptions available to companies seeking to implement an employee share scheme.

Provided that its policy objectives for employee incentive schemes are met, ASIC can still also grant case-by-case exemptions where an employer's scheme does not fall within the class order relief or existing Corporations Act exemptions.

 

Key changes

Class Order 14/1000 and Class Order 14/1001 provide additional exemptions for employee incentive schemes through the following key changes:

  1. expansion of the categories of people who can make, and participate in, offers;
  2. expansion of the classes of financial products which may be offered;
  3. greater flexibility in the way employee incentive schemes can be structured;
  4. reduction in the administrative burden of having to provide copies of documents to ASIC; and
  5. expansion of the types of situations where unlisted bodies may offer employee incentive schemes.

A printable summary of the updated regime, including these key changes, is detailed in this PDF.

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Employee incentive scheme changes: good news for prospective participants

  • The changes are good news for prospective participants, as they should reduce the regulatory burden on companies and therefore make it easier for employers to develop and implement employee incentive schemes.

  • Employers are now afforded a greater degree of flexibility in structuring employee incentive schemes, and are able to offer a wider range of financial products to a wider range of participants. The update has also helpfully clarified areas of uncertainty under the previous regime and removed unnecessary administrative burdens for employers.

  • However, ASIC's exemptions are not unconditional and it has imposed new conditions to support the interests of participants who are considering taking part in such a scheme. For example, companies will still have certain disclosure obligations as ASIC believes a certain minimum level of information and disclosure is warranted.

  • Expansion of exemptions in respect of unlisted bodies has also been more limited. This is because ASIC considers that participants in unlisted bodies are less likely to be able to assess the value of securities being offered by reference to a reliable market price, and it notes that unlisted bodies are subject to a lower level of supervision.

 

Government proposed taxation changes

On 14 October 2014, the Federal Government released its National Industry Investment and Competitiveness Agenda. The Agenda included a proposal to reform the tax treatment of employee share schemes to bolster entrepreneurship in Australia and support innovative start-up companies. These changes will complement ASIC's updated policy in relation to share incentive schemes by helping to minimise the costs and complexity for companies of implementing and maintaining such schemes.

It is proposed that the changes to the tax treatment of employee share schemes introduced by the former Labor Government in 2009 be unwound, benefiting all employee option holders, particularly holders in selected start-up companies.

The Treasury is currently undertaking a consultation period with industry to ensure that the draft legislation meets the objectives stated by the Federal Government, with the legislation proposed to come into effect on 1 July 2015.

The proposed changes are likely to be welcomed by employers, as certain start-up companies in Australia should be able to provide more attractive employee share schemes to enable them to recruit and retain high-quality staff (eg by deferring the taxation of those benefits represented by discounted share options or shares).  However, given the Government's general policy of supporting the use of employee share schemes and its recognition of the benefits such schemes can bring to the wider economy, the proposed changes appear rather narrow in their application.

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What are the proposed taxation changes?

The Agenda proposed that the following changes to the taxation of employee share schemes take effect from 1 July 2015:

  • for all companies, the taxing point of options will occur at the time of exercise (ie when the employee receives the shares);
  • the extension of the maximum time for tax deferral from seven years from acquisition of interests to 15 years;
  • an update to the 'safe harbour' valuation tables used to value unlisted rights to ensure they reflect current market conditions; and
  • employees of certain eligible start-up companies will benefit from a concession allowing them to receive options or shares at a small discount, and have taxation on the options deferred until the shares acquired through the exercise of the options are sold or the small discount applied to the shares is exempt from tax at the date of grant. This is provided that:
    • the options or shares are held for at least three years; and
    • the company is unlisted, has a turnover of not more than $50m and has been incorporated for less than ten years.

The Government has also confirmed that the following provisions will be retained:

  • the integrity provisions introduced in 2009; and
  • the $1,000 up-front tax concession for employees who earn less than $180,000 per year.

The Treasury is currently undertaking a consultation period with industry (including ASIC) to ensure that the legislation meets the objectives stated by the Federal Government. The Australian Taxation Office will also work with industry to develop and approve standardised documentation with the aim of streamlining the process of implementing and maintaining employee share schemes.


Further information

All information on this site is of a general nature only and is not intended to be relied upon as, nor to be a substitute for, specific legal professional advice. No responsibility for the loss occasioned to any person acting on or refraining from action as a result of any material published can be accepted.

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