How to manage employees' equity in Australia
Granting equity to employees is a crucial investment in the future of any competitive business. Doing so fosters a sense of ownership, motivation, and loyalty among employees since they have a personal stake.
The key to offering non-cash compensation is to be transparent about how it works and create a space for the team to understand the details. In Australia, offering and managing employee equity plans can get complex with local and regional regulations set by the Australian Parliament and the Australian Securities & Investments Commission.
We break down the essentials below on managing employee equity in Australia and staying compliant in the regulatory landscape.
Equity 101: Stock options, RSUs, and ESPP
Let's start by defining the three main types of equity: stock options, RSUs, and ESPP.
- Stock options allow employees to purchase company shares at a set price within a specific timeframe. Compensation packages often include stock options to incentivise employees and align their interests with the company's. This option allows employees to profit if the company's stock price rises above the set price; they can buy shares at a discount and sell them at a higher market value later.
- Restricted Stock Units (RSUs) are employee compensation types granting the right to receive company shares after fulfilling certain conditions, typically related to time (vesting) or performance. Unlike stock options, RSUs are valuable from the beginning, even if the company's stock price decreases, providing a guaranteed level of compensation. However, until the RSUs vest, the employee doesn't own the shares and, therefore, has no shareholder rights, such as voting. After vesting, the RSUs are converted into company shares that the employee owns.
- An Employee Stock Purchase Plan (ESPP) is a stock program companies offer employees as part of their payroll. Employees can contribute part of their salary over a set period through automated payroll deductions. At the end of that period, the collected contributions are used to buy company stock at a discounted price (generally below the market value).
What are the rules for companies granting equity awards to employees?
Employee Share Schemes (ESS) in Australia offer a way for companies to grant equity to their employees, serving as an effective tool for attracting, retaining, and motivating staff. Implementing an ESS, however, requires careful navigation of various legal, tax, and regulatory frameworks to ensure compliance and to achieve the intended benefits for both the company and its employees.
1. ESS Offers: Monetary and Non-Monetary
Australian companies can make ESS offers with or without requiring monetary payment from employees. Non-monetary compensation, such as RSUs, can be provided with minimal disclosure, provided the offers are clearly stated to comply with new ESS rules. For ESS offers requiring monetary payment (e.g., stock options or share purchase plans), companies must prepare an 'ESS offer document' and adhere to specific issuance caps—5% for listed and 20% for unlisted companies.
Additionally, there's an increased monetary cap for offers by unlisted companies, set at AUD 30,000 per employee over 12 months.
2. Securities law compliance
Under the Corporations Act 2001, companies issuing equity awards face securities law requirements. While publicly listed companies face stringent disclosure requirements, exemptions for ESS can reduce the burden, especially benefiting small and startup businesses. Depending on the ESS scheme, companies may need to prepare offer documents that meet regulatory standards, though exemptions can lessen this need, particularly for private companies.
3. Corporate law considerations
Corporate law implications, such as the need for shareholder approval for the creation and allocation of shares under an ESS, must also be taken into account. This ensures that the issuance of equity aligns with the company's governance structures and shareholder interests.
4. Regulatory changes and reforms
Significant reforms have been introduced to simplify the process for companies, particularly private ones, in offering equity awards. Notably, changes effective from 1 October, 2022, have included relaxed rules around offer documents and increased monetary caps for unlisted companies, making it easier to implement ESS.
5. Documentation and reporting
Accurate documentation and reporting are crucial for tax and regulatory compliance. Companies must keep detailed records of how they allocate and manage equity awards, adhering to both Australian and potentially international tax and employment laws.
6. International employees
For companies with international employees, additional considerations around taxation and compliance with the laws of the employees' home countries may be necessary. This ensures that the ESS is beneficial and compliant across different jurisdictions.
Navigating the complex landscape of ESS requires careful planning and consultation with legal and financial experts. By adhering to these guidelines, companies can leverage ESS as a strategic tool for growth and employee engagement, ensuring compliance and maximising the benefits of offering equity to employees.
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How do I assign equity to employees?
An Employee Share Scheme can help attract and retain talent, create ownership within the team, and reward employees for their hard work—all vital benefits to your company.
Here’s a brief overview of how to assign equity to employees:
- Create an allocation strategy. You can distribute employee equity based on seniority, role, performance, or equally across the team. Keep in mind that equity is a limited resource, so balance generous grants with preserving equity for future hiring and fundraising needs.
- Choose the equity offerings. Consult with a financial or legal expert to grasp the tax, dilution, and administration implications of receiving stock options, RSUs, or participating in an ESPP as a public or private company.
- Designate a vesting schedule. Equity awards typically vest over time to incentivise employee retention. A typical schedule is four years with a one-year 'cliff' (no equity until the one-year mark) before equity is granted.
- Set a fair market exercise price. If your company offers stock options, it's crucial to set the exercise price at the fair market value of the stock at the time the options are granted. Otherwise, setting it too low could result in tax implications.
- Document the ESS plan. Document all equity awards in a clear equity incentive plan, provide each employee with a grant agreement outlining their award specifics, and provide personalised training when necessary.
Below is an overview of the key considerations for Australian companies planning to offer ESS:
Taxes and deductions for employee equity in Australia
Options
RSUs
ESPPs
Taxation of employee
Options are taxed when exercised, unless restrictions apply, allowing for tax deferral up to 15 years.
On selling the shares, profits may be halved for CGT if held for over a year, offering a significant tax advantage for employees.
RSUs are typically taxed at vesting, when control and ownership of the shares transfer to the employee, making the fair market value at that time assessable income.
If the shares are held beyond vesting and later sold, any capital gain is subject to CGT, with a potential 50% discount if held for more than a year from the vesting date.
Taxation on Employee Stock Purchase Plans (ESPPs) occurs when shares are acquired, based on the discount received.
If the shares are sold later, any capital gain from the sale price over the market value at acquisition is subject to CGT, with a 50% discount available if the shares are held for more than one year.
Sub deduction
Might be allowed if the subsidiary reimburses the parent under a written agreement and certain other conditions are met.
Might be allowed if the subsidiary reimburses the parent under a written agreement.
Might be allowed if the subsidiary reimburses the parent under a written agreement.
Withholding and reporting
Employers must withhold tax at exercise if the employee hasn't provided a Tax File Number (TFN) or Australian Business Number (ABN).
Employers must also report the benefit from stock options in the employee's income statement as part of the payroll reporting process.
Employers must withhold tax at exercise if the employee hasn't provided a Tax File Number (TFN) or Australian Business Number (ABN).
Employers must also report the benefit from stock options in the employee's income statement as part of the payroll reporting process.
Employers must withhold tax at exercise if the employee hasn't provided a Tax File Number (TFN) or Australian Business Number (ABN).
Employers must also report the benefit from stock options in the employee's income statement as part of the payroll reporting process.
Securities restrictions
If you are not exempt under Division 1A of Part 7.12 of the Corporations Act 2001 (Cth), you need a prospectus. If you are exempt, you must provide award recipients with an Offering Document that includes certain information and meets other conditions.
A new self-executing exemption applies to awards granted for no consideration (e.g. RSUs) after October 1, 2022. The award documents must include a securities legend reflecting reliance on the exemption.
Unless exempted under Division 1A of Part 7.12 of the Corporations Act 2001 (Cth), a prospectus is generally required. If exempted, an Offering Document containing prescribed information must be provided to the award recipients. Payroll deductions should be held separately.
What information do I need to report to ASIC?
If your company issues shares, it must record them in the ASIC register. The register must contain the following information about each member and their shares:
- Their name and address
- The date added to the register
- The shares held by each member
- The date of every issue of shares
- The number of shares in each allotment
- The class of shares
- The share numbers or share certificate numbers (if any)
- Indicate whether the shares are fully paid, including any unpaid amounts on the shares
Companies that provide shares, rights and options to their employees under an employee share scheme must submit an annual ESS report to the Australian Taxation Office (ATO) and an ESS statement to employees. Employees must receive ESS statements by 14 July, and the ATO should get the ESS annual report by 14 August, following the tax year's end.
For Australian-listed companies, your share plan administrator can assist with ESS reporting. If you're a private company without an Australian administrator, you may use the ATO Business Portal's ESS online form to lodge the annual report. Penalties may be applied if you file late, or if you fail to file.
Best practices for employee equity in Australia
When communicating equity plans, you want to take the time to explain all the details and be transparent, which is crucial when new laws—like the securities law for employee share plans—come into effect.
Employees can better understand their equity packages through workshops, informational sessions, or one-on-one consultations. During these training sessions, specify the equity type, vesting schedules, and exercise prices. Additionally, you should explain the risks and advantages of equity ownership and tax implications.
The ultimate goal is for employees to confidently participate in the company's growth journey and feel valued in the process.
Rippling and its affiliates do not provide tax, accounting, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any related activities or transactions.
