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Regulatory reforms to promote greater employee share ownership

Startup & Venture Capital, Taxation
Startup team in meeting
An article published in today’s AFR explores how reforms to employee share schemes announced in last month’s federal budget will allow Australian companies to provide meaningful equity incentives to employees in a tight labour market.

Quoted at length in the article, tax partner Shaun Cartoon explains that under the revised rules eligible start-up employees of unlisted companies will not be taxed on the granting or vesting of the options. Rather, they will be taxed when they sell their shares, with the gain generally qualifying for the capital gains tax discount.

“In Australia, this is as close as it gets to share scheme nirvana,” Shaun said.

Also included in this year’s federal budged are plans to introduce higher investment thresholds for employees. Currently, offers to eligible employees of unlisted companies are capped at $5,000 each year but, from 1 October, the cap will be increased to $30,000 a year, or $150,000 over five years.

Shaun explains that as long as safeguards - such as not exceeding yearly caps or meeting disclosure obligations - are met, employees at all levels will be able to obtain an unlimited number of shares with unlimited underlying value. The new laws apply to both listed and unlisted companies.

“Listed companies have been largely content with the existing framework,” Shaun says. “The sweet spot for the new rules will be high-growth tech start-ups and scale-ups that want to attract and retain the best talent, but have limited cash. That said, founders of new businesses generally guard their equity tightly and are reluctant to give it away unless it makes business sense”.

To read the full article in the AFR, click here.

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