Guide to Employee Equity Plans

5 Jun 2024

Whether you’re an employee or an Australian business owner, you may have encountered the term “Employee Equity Plan”. From both perspectives, there is a lot to consider as this can benefit both employees and your businesses. From the types of plans to employee eligibility, BoardRoom invites you to a deep delve into the world of employee equity plans.

Understanding What Employee Equity Plans Are

Also known as employee share schemes (ESS), employee equity plans are a type of compensation strategy that grants your employees ownership in the company. This can be done through stock options, restricted stock, or other forms of equity. These plans are designed to align the interests of employees with those of the company, as they have a vested interest in the success and growth of the business. As a result, your employees are motivated to work harder and make decisions that benefit your company.

Why do companies offer Employee Equity Plans?

Organisations may offer employee equity plans as a way to attract and retain top talent. By offering ownership in the company, employees have a vested interest in the growth and profitability of the business, which can motivate them to work harder and make decisions that benefit the company. This can lead to increased employee satisfaction and loyalty, as well as driving company performance in the long term. Additionally, offering company equity can be a cost-effective way to compensate employees, as the value of the equity may increase over timee.

Types of Employee Equity

There are three types of employee equity that Australian companies offer to their high-performing employees, Employee Share Ownership Plans, Share Purchase Plans, and Option-based ESS.

Granted Equities Under Employee Share Ownership Plans

Employee Share Ownership Plans are a type of employee equity plan where employees are given ownership in the company through shares. These plans typically work by allocating a certain percentage of the company’s stock to a trust. When employees leave the company, the shares are sold back to the company and they receive dividends if the company’s stock value increases.

An additional advantage of Employee Share Ownership Plan is the potential tax benefits for both the company and the employees. In Australia, companies offering Employee Share Ownership Plan may receive a tax deduction for the cost of issuing the shares to employees. Employees may also receive tax benefits, as they are only taxed on the value of the shares when they are sold, not when they are granted. Additionally, if the company is eligible for the ESS tax concessions, the employee may only pay capital gains tax on half of the value of the shares sold, making Employee Share Ownership Plan an attractive option for both companies and employees.

Equities Bought Under Share Purchase Plans (SPP)

This type of employee equity allows employees to purchase company shares at a discounted price as opposed to being given the shares. These plans typically work by offering employees the opportunity to purchase a set number of shares at a predetermined price, usually lower than the current market price. SPPs can be offered in addition to other employee equity plans, such as Employee Share Ownership Plan or Employee Stock Option Plan (ESOP) stock options.

One of the main benefits of SPPs is that they can be more cost-effective for companies, as they do not have to issue new shares or dilute the ownership of existing shareholders. They also provide a way for employees to share in the company’s success without having to make a large financial investment.

However, there can be tax implications for both the company and employees with SPPs. In Australia, companies offering SPPs may be subject to fringe benefits tax, and employees may be taxed based on the profit earned once they sell their shares.

Employee Stock Option Plan (ESOP)

Stock option is a type of equity where employees are granted the option to purchase company shares at a predetermined price, known as the exercise price. These options can be exercised at a future date, allowing employees to benefit from any increase in the company’s stock price. Companies typically use stock options as a way to attract and retain employees, as well as align their interests with the success of the company.

The process of option-based employee equity plan typically involves granting options to employees, which gives them the right to purchase shares at the exercise price. Once the options have vested, employees can choose to exercise their options and purchase the shares. Profits made from exercising the options may be subject to capital gains tax.

In Australia, companies offering option-based employee equity may be eligible for tax concessions under the Employee Share Scheme (ESS). This can provide tax benefits for both the company and employees, making it an attractive option for businesses.

Tax Considerations for Employees

When considering employee equity plans in Australian companies, there are two major tax considerations that employers should consider from the employee’s perspective. They should be aware of the tax consequences of acquiring shares or options, as well as the tax implications of selling shares or exercising options.

When acquiring shares or options as part of an employee equity plan, your employees may be subject to income tax on the value of the shares or options received. This is usually calculated based on the market value of the shares or the difference between the exercise price and the market value of the shares.

Similar to acquiring, your employees may be subject to capital gains tax on any gains made when selling shares or exercising options. The timing of when they sell or exercise can also impact the amount of tax they pay. If they hold onto the shares for at least 12 months, they may be eligible for the 50% discount on capital gains tax. However, choosing to sell or exercise within 12 months may cause them to be subjected to their full marginal tax rate on any gains.

ESS Eligibility and Participation

To allow your employees to participate in an employee equity plan in Australia, both your company and your employees must meet certain eligibility requirements. Your company must first be incorporated in Australia and have less than $50 million in turnover to be eligible for the ESS tax concessions.

On the other hand, employees who are typically eligible to participate in an ESS include full-time, part-time, or casual employees, as well as directors, consultants, and contractors. However, there are certain restrictions for employees who hold more than 10% of the company’s shares or voting rights.

Regarding participation, employees must first be offered the opportunity to acquire shares or options at a discount or with favourable terms. They must also be given the right to participate in any employee share plan offered by your company. They can participate by accepting the offer to acquire shares or options and meeting any associated requirements, such as vesting periods or performance targets. They may also have the option to defer the acquisition of shares or options, depending on the structure of the ESS.

ESS for Startups in Australia

The Startup concessions, introduced in 2015, allow eligible startups to claim a tax exemption for shares or options issued to employees under an employee equity plan. This means that you will not be subject to income tax on the value of the shares or options received.

When designing an ESS for a startup, it’s important to consider the company’s current and future financial needs, as well as the potential tax implications for both the company and its employees. A common structure for startups is a combination of stock options and shares, with a vesting period and performance targets to align employee and company interests.

How can BoardRoom help you?

Employee equity plans can provide various benefits for both companies and employees, such as aligning interests, attracting and retaining top talent, and potential tax savings. However, there are also potential drawbacks to consider, such as the risk of shares becoming worthless and the potential tax implications for employees.

It’s important for employees to thoroughly understand the terms and conditions of the ESS and seek professional advice from a financial advisor or tax specialist before participating. This can help ensure they make informed decisions and maximise the potential benefits of an ESS.

Backed by years of expertise, BoardRoom is the preferred service provider by many of Australia’s largest employers to provide and manage their employee equity plans. With personalised plans to match the needs of your firm while motivating the key members of your workforce, you can be sure that our offerings can help strike the perfect balance that benefits both your firm and your team. Whether you’re a growing Australian SME or an established enterprise, don’t hesitate to learn more about our ESS offerings by contacting us today.

Contact BoardRoom for more information:

David Park

Business Development Manager
+61 2 9290 9658