In today's tight labour market we continue to see interest from employer clients in establishing employee share schemes in order to retain, attract and incentivise talent.
Perhaps the most straightforward of the schemes to create, administer and explain to staff is one relying upon the "eligible start up concessions" in the Tax Act. It also provides the most favourable tax result for the employees as there are no income tax consequences for them and enables them to acquire the shares on capital account. Therefore, the employee will be in a positon to rely upon the 50% CGT concession when the shares are ultimately disposed of.
In terms of the type of equity which can be offered and the extent of it, they have to be ordinary shares and no more than 10% of the company's capital can be made available to employees using the eligible start up concessions.
There are safe harbour rules which apply which enable the shares to be issued at up to a discount of 15% to their market value. We discuss further below how market value is determined.
The trick with the eligible start up concessions relates to whether the employer is eligible to offer a scheme relying upon these concessions and, further, is able to rely upon special valuation rules which enable the company to be valued on a net tangible asset basis. Ie ignoring goodwill. .
For the eligible start up concessions to apply at all the employer is required to have been incorporated for less than ten years and have less than $50m in turnover.
The special valuation rules enabling valuation on a net tangible asset basis are available if the following additional criteria are satisfied:
- the employer company has been incorporated for less than seven years or has turnover of less than $10m; and
- the employer company has not raised more than $10m in capital during the last 12 months and doesn't anticipate a change in control in the next six months.
If those special valuation rules can be relied upon then there would generally be no need to obtain an independent valuation of the company. Instead, the issue price of the shares could be determined by reference to the net tangible assets of the company as per its current balance sheet.
If the special valuation rules are not available but the employer company does meet the aforementioned definition of an "eligible start up" then there may be a need for an independent valuation and the issue price of the shares would need to take account of the goodwill component.
The eligible start up concessions can also be used in relation to the grant of options as can the special valuation rules. The only essential difference is that with options the exercise price has to be at least equal to the current market price (i.e. based on net tangible assets if the special valuation rules are available) and the "15% discount safe harbour" isn't available.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.