Proposed changes to employee share schemes for small business

The Federal Government recently announced proposed changes to simplify and extend the current employee share scheme regulatory framework to make it easier for small businesses to offer shares to their employees.

The current framework imposes various restrictions and prohibitions on offers made under employee share schemes, with some relief available in the form of statutory exemptions and Australian Securities and Investments Commission (ASIC) Class Order 14/1001 (Class Order), which provides conditional relief for unlisted companies to facilitate offers under employee share schemes. While the Class Order assists in extending relief beyond the limited and discrete statutory exemptions, the conditions imposed by ASIC in the Class Order are quite restrictive and limit the ways in which companies can structure the offers to be made to their employees; for example, under the Class Order the value of eligible products under an offer must not exceed $5,000 per employee per year.

The Government’s proposed changes follow reforms introduced on 1 July 2015 that amended the existing tax concessions that applied to employee share schemes.

What are the proposed changes?

The proposed changes involve doubling the current value limit of financial products that can be offered in a 12 month period to $10,000 per employee. Under the current framework, unlisted companies are only able to offer up to $5,000 in eligible financial products per employee per year.

The Government is also proposing to extend employee share schemes to include contribution plans, where an employee can make a monetary contribution to acquire eligible financial products. Currently, the Class Order prohibits unlisted companies from making offers under an employee incentive scheme that involves a contribution plan. It is not currently clear whether the proposed extension will involve a specific contribution plan value limit that would apply in addition to the overarching $10,000 annual per employee value limit.

Under the proposed changes, small businesses will also be able to offer employee share schemes without publicly disclosing commercially sensitive financial information unless they are otherwise obligated to do. At this stage, it is not clear how this change will be implemented, including whether any restrictions or conditions will be imposed.

The Government is also proposing to simplify the current framework to create a dedicated exemption for disclosure, licensing, advertising and on-sale obligations currently imposed under the Corporations Act 2001 (Cth) (Corporations Act). It is not clear whether the proposed new exemption will extend beyond shares and options to incentive rights such as performance rights, which are considered by ASIC to be derivatives for the purpose of the Corporations Act and are dealt with separately under that Act.

Who do the proposed changes apply to?

The Government has expressed that the proposed changes are intended to apply to small businesses. What constitutes a small business for the purpose of the proposed reforms has not been specified; for example, whether this will align with the definition of ‘small business entity’ for income taxation purposes.¹

Additionally, it is somewhat ambiguous whether the proposed changes will apply to small businesses exclusively. This will in part depend on how the Government intends to implement the proposed reforms, which has not been articulated.

What do the proposed changes mean?

It is not clear at this stage exactly how the proposed changes will interact with the existing framework, including the conditional relief provided under the Class Order. This will depend on how the proposed reforms are intended to be implemented.

While it is unclear when and how the proposed changes will be implemented, the proposal signifies the commencement of a conversation in relation to reducing the compliance burden for small businesses making offers under employee share schemes beyond the limited and conditional relief currently available under the Corporations Act and the Class Order, respectively.

With research generally supporting the principle that ongoing ownership interests can lead to greater employee engagement and improved business outcomes,² it is appropriate that the current regulatory framework be reviewed to make it easier for businesses, particularly small businesses to offer employee share schemes.

This article was written by Jamie Restas, Partner, Cam Steele, Special Counsel, and Stephanie Kolaczkos, Solicitor.

¹ A small business entity is an entity that carries on a business for all or part of the income year and has an aggregate turnover less than $10 million (section 328-110 of the Income Tax Assessment Act 1997 (Cth)).
² ASIC Regulatory Guide 49, RG 49.1.