Recent ATO concessions allow certain employers to introduce employee share plans at a drastically reduced cost, including free ATO approved standard legal documentation and safe harbour valuation methods for valuing issued shares, said Mr Jolyon Dare, tax consulting partner with HLB Mann Judd Sydney.
The new concessional employee share rules, which were introduced on July 1, are cost effective and go a long way towards providing a motivational boost for your entire staff base, Mr Dare says.
“It is now possible to implement an employee share option plan, rolled out across the business to multiple employees, for less than the cost of a $5,000 bonus provided for a single employee,” Mr Dare says.
“To put these concessions in perspective, implementing a typical staff share plan will generally cost upwards of $30,000 after legal and valuation costs. With these new ATO concessions, you have achieve the same result for less than $5,000.”
To be eligible to apply the new rules, unlisted companies need to meet some additional conditions, Mr Dare says.
These include that the employer be an Australian tax resident, although other entities in the group can be foreign. Additionally, the employer must be incorporated within the last 10 years, and this incorporation requirement includes all other companies in the group.
A further requirement is that the employer must have under $50 million in annual turnover when aggregated with other entities in the group. In addition, the employer cannot be a share/securities investment business.
“As well as the generous employer allowances, there are a range of additional advantages for employees’ in a concessional scheme, making employee shares an even more attractive option for individual employees,” Mr Dare says.
These concessions include:
• The first 15% of the value of the issued shares are tax-free to the employee. If an employee was issued shares worth $100, the employee would only pay $85 for the shares, and would pay not tax on that purchase
• The individual 50% capital gains tax discount applies on the balance. So if the employee sells the shares for $150 in year three, tax is only paid based on the 50 per cent CGT discount – that is, half of their usual marginal tax rate
• The cost base uplift applies, meaning there is a reduction in the resulting capital gain on sale of shares. This means that the gross gain is considered to be $50 ($150-$100) and not $65 ($150-$85), as the tax base price of the shares for CGT is uplifted from $85 to $100.
“Using this example, although the gain is $65, the employee pays tax at their marginal rate on only $25 of it,” Mr Dare said.
“There are a number of advantages in implementing employee share plans in a business. They provide employees with a tangible interest in helping the business grow, not just in the short term, but well into the future. Additionally, an employee shares plan is a powerful incentive when trying to attract and retain the right employees.
“The ATO concessions put employee shares plans within easy reach of even small businesses, allowing employers to drastically reduce the cost, risk and complexity of implementing a staff share plan.”
HLB Mann Judd Sydney is a firm of accountants and business and financial advisers, and part of the HLB Mann Judd Australasian Association.