Employee share plans in Australia: regulatory overview

A Q&A guide to employee share plans law in Australia.

The Q&A gives a high level overview of the key practical issues including, whether share plans are common and can be offered by foreign parent companies, the structure and rules relating to the different types of share option plan, share purchase plan and phantom share plan, taxation, corporate governance guidelines, consultation duties, exchange control regulations, taxation of internationally mobile employees, prospectus requirements, and necessary regulatory consents and filings.

To compare answers across multiple jurisdictions, visit the Employee Share Plans: Country Q&A tool.

This Q&A is part of the global guide to employee share plans law. For a full list of jurisdictional Q&As visit www.practicallaw.com/employeeshareplans-guide.

Contents

Employee participation

1. Is it common for employees to be offered participation in an employee share plan?

It is common for Australian public listed companies to offer participation in an employee share plan to employees as part of a compensation package. Private companies can also offer participation in an employee share plan, but this is less common due to the absence of a secondary market for a private company's shares and narrower relief from Australian disclosure laws that is available for employee share plans for private companies.

 
2. Can employees be offered a share plan where the shares to be acquired are in a foreign parent company?

Employees can be, and often are, offered participation in a share plan where the shares to be acquired are in a foreign parent company. The foreign parent must issue a prospectus and may need to hold an Australian financial services licence (AFSL), except where it is able to rely on a statutory exemption from these requirements or relief granted by the Australian Securities and Investments Commission (ASIC). ASIC has granted class order relief in relation to employee incentive schemes operated by listed companies (CO 14/1000) and by unlisted companies (CO 14/1001) (EIS Class Orders). The EIS Class Orders specifically contemplate that shares in the capital of a foreign parent company will be offered to Australian employees. One of the requirements of CO 14/1000 is that products of the foreign parent company in the same class as those being offered were able to be traded on an eligible financial market (see below) at all times in the three months before the date of the offer and trading in those products was not suspended for more than a total of five days during the 12 months before the date of the offer (or the period that the class of products was able to traded, if shorter).

Eligible financial markets are the following:

  • Australian Securities Exchange.

  • American Stock Exchange.

  • Borsa Italiana.

  • Bursa Malaysia Main Board and Bursa Malaysia Second Board.

  • Euronext Amsterdam.

  • Euronext Paris.

  • Frankfurt Stock Exchange.

  • Hong Kong Stock Exchange.

  • JSE.

  • London Stock Exchange.

  • NASDAQ Global Market or the NASDAQ Global Select Market.

  • New York Stock Exchange.

  • New Zealand Stock Exchange.

  • Singapore Exchange.

  • SWX Swiss Exchange.

  • Tokyo Stock Exchange.

  • Toronto Stock Exchange.

 

Share option plans

3. What types of share option plan are operated in your jurisdiction?

Share option plans

Types of plans. Share option plans typically take the form of a right granted to the employee by the employer to acquire a fixed number of shares at some time in the future at a fixed (or nil) exercise price. Vesting is usually dependent on either continuing employment requirements and/or company or individual performance benchmarks.

There is generally little variation from this plan/award structure although the tax changes in 2009 resulted in some companies structuring their option plans as ZEPOs (zero exercise price options), with no exercise price and the shares delivered automatically on vesting. From a tax perspective, that is no longer needed for grants from 1 July 2015 due to further changes to the tax laws, under which the taxing point for options reverted to exercise not vesting. (Some option plans include an election (generally in favour of the issuing company) to provide the economic value of options in cash rather than shares. Offers under such plans are eligible for relief under the EIS Class Orders.) Sometimes shares must remain held subject to restrictions under the plan after delivery to defer the time tax would otherwise become payable.

Types of companies. Share option plans under which employees are awarded the right to acquire shares in the employing company or another member of the group for a fixed price can be offered by public and private companies in Australia.

Popularity. The popularity of share option plans with a material exercise price decreased after the tax changes in 2009, which provided for an income tax liability to arise when the option vests (not when it is exercised). The decrease in popularity of those types of share option plans has been mirrored by an increase in the popularity of performance rights plans (including ZEPO plans) and/or deferred share plans, which carry no risk of tax being payable on options that turn out to be out-of-the-money and therefore are preferable from a tax perspective. As noted above, the tax laws have changed and for options granted from 1 July 2015 the taxing point has reverted to exercise. While some multinational organisations have extended their option plans to their Australian-based workforce, these plans have yet to be re-embraced on a large scale by purely Australian-based corporate groups.

Grant

4. What rules apply to the grant of employee share options?

Share option plan

Discretionary/all-employee. Although share option plans can be, and often are, granted on a discretionary basis to members of a company's senior management team and key executives, it is possible for companies to offer participation in a share option plan to all employees.

Non-employee participation. Non-employee directors, contractors, casual employees and prospective employees can be offered participation in a share option plan. In relation to offers to non-employee directors, contractors and casual employees of the issuer or an associated body corporate, there is relief from the disclosure and financial services licensing requirements provided by the EIS Class Orders. To rely on the relief provided by the EIS Class Orders, contractors and casual employees to whom offers are made must, among other things, be engaged, or reasonably expected to be engaged, for at least the number of hours that are the pro rata equivalent of 40% or more of a comparable full-time position with the body. Offers to individuals who are not yet an employee, non-employee director, contractor or casual employee can rely on the EIS Class Orders provided that the individual can only accept the offer if an arrangement has been entered into that will result in the individual becoming an employee, non-employee director, contractor or casual employee.

In addition, the listing rules (Listing Rules) of the Australian Securities Exchange (ASX) require the approval of shareholders before options to subscribe for new shares are issued to directors, their associates or any person who, in the ASX's opinion, has a relationship with either the company, a director or an associate of a director.

The tax benefits applying to share option plans can also be made available to directors (provided they receive payments from which an amount must be withheld under the tax withholding rules) and consultants, provided the relevant conditions are met. Care must be taken when granting share options to consultants to ensure that tax withholding is not required when the award is granted.

Maximum value of shares. Shares issued under a share option plan (or any other form of employee incentive scheme for that matter) are not subject to a maximum value. However, it is a condition of relief provided by the EIS Class Orders that the issuer must have reasonable grounds to believe that the number of shares issued under the relevant plan and other employee incentive schemes covered by the EIS Class Orders or an ASIC exempt arrangement of a similar kind to an employee incentive scheme during the previous three year period will not exceed 5% (in the case of listed companies) or 20% (in the case of unlisted companies) of the total number of issued shares in the relevant class.

Market value. Generally there is no requirement that options have an exercise price equivalent to market value of the underlying shares at the date of grant. However, if an offer of options is being made by an eligible "start-up" company and the intention is for the new "start-up" tax concessions to apply, the exercise price must be at least equal to the market value of the shares on the grant date.

 
5. What are the tax and social security implications of the grant of the option?

The taxation of employee share scheme interests (ESS interests) acquired at a discount is governed by Division 83A of the Income Tax Assessment Act 1997 (Cth) and related capital gains tax (CGT) provisions.

Employee position

Employees must include any discount in respect of the grant of options in their assessable income and pay tax on the discount at their marginal rate. Employer tax withholding is not required, unless the employee has not provided their tax file number (TFN) to their employer. However, new employers generally give their TFN to their new employer to ensure tax is not withheld from their salary at higher rates, so the circumstances in which TFN withholding will apply to ESS interests are rare.

The default position is that the employee is taxable on the full amount of the discount at grant. However, this is subject to two concessions available under Division 83A:

  • The A$1,000 tax-free concession. The A$1,000 tax-free concession means that the employee will be taxable at grant but the first A$1,000 of the discount will not be taxable.

  • The automatic tax deferral concession. The tax deferral concession means that the employee remains taxable on the full discount but the tax liability is deferred until a "deferred taxing point" occurs.

It is unusual for share option plans to be structured to allow employees to access the A$1,000 tax-free concession. The more common concession that is sought with share option plans is tax deferral.

Tax-free concession. The employee is entitled to the A$1,000 tax-free concession if all of the following conditions are met:

  • The employee's taxable income for the year is A$180,000 or less (this includes compulsory superannuation contributions and fringe benefits).

  • The employee is employed by the company in which the options are being offered, or a Corporations Act 2001 (Cth) (Corporations Act) subsidiary of that company.

  • All the options available under the scheme relate to ordinary shares.

  • The predominant business of the company is not the acquisition, sale or holding of shares, securities or other investments, and certain employment-related criteria relating to the employee are met.

  • The plan is operated on a non-discriminatory basis in relation to at least 75% of Australian resident permanent employees with at least three years of service.

  • Immediately after the options are acquired, the employee does not hold a controlling interest in more than 10% of the company's shares, determined on an "associate"-inclusive basis (the 10% test).

  • There is no risk of the employee forfeiting the options under the conditions of the scheme.

  • The scheme is operated so that no employee participant can dispose of their options for at least three years from the date the options are acquired (or following them ceasing group employment).

Tax deferral concession. The employee is entitled to the tax deferral concession if all of the following conditions are met:

  • All the interests that can be acquired under the share option plan relate to ordinary shares.

  • The employee is employed by the company in which the options are being offered, or a Corporations Act subsidiary of that company.

  • The predominant business of the company is not the acquisition, sale or holding of shares, securities or other investments and certain employment-related criteria relating to the employee are met.

  • The 10% test is satisfied (see above, Tax-free concession).

  • Either:

    • there is a real risk that under the conditions of the plan, the employee will forfeit (see below) or lose either the options (other than by exercising them, disposing of them or letting them lapse) or the beneficial interest in the underlying shares (other than by disposing of them); or

    • the options are subject to a genuine disposal restriction from the date they are granted and the governing rules of the plan expressly state that the tax deferral rules in Subdivision 83A-C of the Income Tax Assessment Act 1997 apply to the plan.

If the tax-deferral conditions are met, any tax liability is automatically deferred. The employee cannot choose or elect to pay tax in the year of grant.

Real risk of forfeiture. Whether the relevant ESS interest is at a "real risk of forfeiture" is a question of fact, although the legislative and Australian Taxation Office (ATO) guidance indicates that the test should be met where the risk is more than a mere possibility and a reasonable person would not disregard it as being highly unlikely to occur, or as nothing more than a rare eventuality or possibility. A real risk of forfeiture can include minimum employment and/or performance-based vesting conditions, but a condition that simply restricts an employee from disposing of an ESS interest for a specified time or which provides that an ESS interest will be forfeited if an employee is dismissed for fraud or gross misconduct will not satisfy the test.

Employer position

The employer must pay payroll tax on the options if they are liable and they have not elected to treat the exercise date as the taxing point. An employer is deemed to have made the election if they do not include any amount in respect of the options in their payroll tax return for the month that the options were granted.

The "provider" of the options must comply with the tax reporting obligations if the options are taxed at grant (that is, tax deferral does not apply) (see Question 31).

Fringe benefits tax (a tax on employers for certain non-cash benefits provided to their employees) does not apply to the grant of options at a discount, provided that the employee is taxable on the discount under Division 83A.

Vesting

6. Can the company specify that the options are only exercisable if certain performance or time-based vesting conditions are met?

The company can specify that the options are only exercisable if certain performance or time-based vesting conditions are met. It is common for companies to do so to create a long term incentive for employees and as a way to offer the benefit of the tax deferral concession (see Question 5, Employee position: Tax deferral concession).

 
7. What are the tax and social security implications when the performance or time-based vesting conditions are met?

Employee position

No tax consequences arise when the options vest if the employee was taxed at grant or the vesting time does not correspond with the exercise of the option.

Employer position

No tax consequences will arise for the employer if the option was taxed at grant or the exercise does not correspond to the vesting time.

Exercise

8. What are the tax and social security implications of the exercise of the option?

Employee position

If the employee has not been taxed on the options at grant, and automatic tax deferral applies, a taxing point will arise at the earliest of:

  • The date the employee exercises the options.

  • The date the employee leaves the group employment in respect of which the options were acquired if the options do not lapse at that time.

  • 15 years from the date the options were granted.

This is subject to the so-called "30 day rule". If the employee disposes of the underlying share within 30 days of what would otherwise have been the deferred taxing point, the sale date is deemed to be the taxing point instead.

If tax deferral applies, the employee must include the taxable amount in their personal tax return for the year in which the deferred taxing point occurs, and pay tax through the self-assessment system. Tax withholding does not apply if the employee has given their tax file number to their employer and the employee must therefore meet the tax liability out of their own funds.

Employer position

The "provider" must comply with the tax reporting obligations if the options are taxed at exercise (see Question 31).

The provider must take into account the 30 day rule (see above, Employee position) if they know that the rule applies.

Payroll tax will be payable if the employer is liable and it elected to defer the liability until exercise.

Sale

9. What are the tax and social security implications when shares acquired on exercise of the option are sold?

Employee position

If the employee has been taxed under the ESS rules, then any subsequent sale of the underlying shares usually has CGT consequences. The difference between the sale proceeds and the CGT cost base of the shares is taxable as a capital gain, and the cost base includes the exercise price. However, if the 30 day rule applies (see Question 7, Employee position), the sale of the shares does not have CGT consequences (this includes the situation where genuine disposal restrictions attaching to the shares are lifted and the employee then sells the shares within 30 days of that time).

If CGT applies, and the shares have been held for more than 12 months before they are sold, the employee is generally entitled to reduce any capital gain by 50% (after first offsetting any available capital loss from other asset disposals). The 12 month ownership period starts from when the shares are acquired, not from when the employee acquired the option.

Employees must include any net capital gain from the sale of the shares in their personal tax returns for the year in which the shares are sold. Employer tax withholding does not apply and the employee must pay CGT through the self-assessment system.

Employer position

There are no tax consequences.

 

Share acquisition or purchase plans

10. What types of share acquisition or share purchase plan are operated in your jurisdiction?

Main characteristics. The commercial needs of the company generally dictate the type of share acquisition/purchase plan that is implemented.

For example, if the company wants to make a broad-based share offer to a large number of employees, companies often structure the offer so that it meets the A$1,000 tax-free concession (see Question 5, Employee position). This then means that the shares are subject to certain conditions; the shares are not subject to forfeiture conditions and are locked-up for at least three years. Alternatively, if the company wants to incentivise a small number of key executives, the offer is often structured to meet the automatic tax deferral requirements, so the shares are subject to a different set of conditions.

Some share plans are also structured so that they fall outside the ESS rules. This requires the employee to fully fund the share acquisition, so that there is no discount to the share's tax market value, with the consequence that the shares are subject to CGT from the acquisition date. It is common with these types of plans to give the employee an interest-free loan to fund the share acquisition, but particular care must be taken with these types of arrangements as they can result in adverse tax consequences for both the employer and the employee if not implemented correctly.

Popularity. Share acquisition plans continue to be a common and popular method of incentivising employees, even after tax changes in 2009. These plans are often used by employers for their broad-based offers, often in conjunction with a performance right or share option plan for select senior executives. Fully funded share plans that fall outside the ESS rules are also popular with start-ups and privately held companies, where the employees prefer to be taxed under the CGT rules, rather than under the ESS rules.

Acquisition or purchase

11. What rules apply to the initial acquisition or purchase of shares?

Discretionary/all-employee. An offer to participate in a share acquisition plan can be awarded on a discretionary basis to particular members of personnel or to all employees, provided that the offers are lawful.

Non-employee participation. The comments in relation to non-employee participation in share option plans set out in Question 4 apply equally to share acquisition plans.

The tax benefits applying to share plans can also be available to directors (provided they receive payments from which an amount must be withheld under the tax withholding rules) and consultants, provided the relevant conditions are met. Care must be taken when granting share awards to consultants to ensure that tax withholding is not required when the award is granted.

Maximum value of shares. There is no maximum value of shares that can be awarded under the plan, either on a per-company or per-employee basis.

The condition to rely on the EIS Class Orders set out in Question 4 also applies to shares issued under a share acquisition plan.

Payment for shares and price. Employees are not normally required to pay for the shares. Where an employee is not required to pay any amount for shares, the full value of the shares will be taxable to the employee at the relevant taxing point.

Participants in a share acquisition plan commonly arrange to sacrifice cash salary or wages and to receive shares in lieu. Employers can also provide financial assistance to employees to acquire shares in some circumstances.

 
12. What are the tax/social security implications of the acquisition or purchase of shares?

Employee position

Employees must include any discount in respect of the acquisition/purchase of shares in their assessable income and pay tax on that discount at their marginal rate.

Employer tax withholding is not required, provided the employee has given their tax file number to their employer.

The default position is tax at grant on the full amount of the discount, but this is subject to the A$1,000 tax-free concession and the automatic tax deferral concessions.

There are a number of conditions that must be met for an employee to be entitled to one of the concessions (see Question 5, Employee position).

In addition, an employee is only entitled to the tax deferral concession if at least 75% of Australian resident employees with at least three years' service are entitled to acquire ESS interests under this or another plan, or must have been entitled at some earlier time.

Additionally, it is possible to acquire tax-deferred shares without there being a "real risk of forfeiture" but only if the shares are acquired under an effective "salary sacrifice" arrangement and their total market value does not exceed A$5,000.

If the shares are taxed at grant, the employee must include the taxable amount in their personal tax return for the grant year, and pay tax through the self-assessment system. Tax withholding does not apply and the employees must meet the tax liabilities out of their own funds.

Employer position

The employer company must pay payroll tax on the shares if it is liable and it has not elected to treat the vesting date as the taxing point (see Question 5).

The provider must comply with the tax reporting obligations if the shares are taxed at acquisition (see Question 31).

Fringe benefits tax does not apply, provided that the employee is taxable on the discount under Division 83A of the ITAA97.

Vesting

13. Can the company award the shares subject to performance or time-based vesting conditions?

The company can award the shares subject to restrictions that are only removed when performance or time-based vesting conditions are met. It is market practice to do so as the effect is to provide greater alignment of the company's and employees' interests and may mean that the offer has the benefit of the tax deferral concession (see Question 4).

 
14. What are the tax and social security implications when any performance or time-based vesting conditions are met?

Employee position

No tax consequences arise when the shares vest if the employee was taxed at grant.

If automatic tax deferral applies, there may be tax consequences. Under the deferral rules, the employee is taxable at the earliest of the following three times, one of which may correspond with the vesting time:

  • Where there is no longer a real risk that, under the conditions of the plan, the employee will forfeit or lose the shares (other than disposing of them) and, if the employee was genuinely restricted from disposing of the shares when they acquired them, the restriction no longer applies.

  • When the employment in respect of which the employee acquired/purchased the shares ceases.

  • 15 years from when the employee acquired/purchased the shares.

This is subject to the 30 day rule (see Question 7).

If tax deferral applies, the employee must include the taxable amount in her personal tax return for the year in which the deferred taxing point occurs, and pay tax through the self-assessment system. Tax withholding does not apply if they have given their tax file number to their employer and the employee must therefore meet the tax liability out of his own funds.

Employer position

The provider must comply with the tax reporting obligations if the shares are taxed at vesting (see Question 31).

The provider must take into account the 30 day rule (see Question 7) if they know that the rule applies.

Payroll tax is payable if the employer is liable and it elected to defer the liability until vesting.

Sale

15. What are the tax and social security implications when the shares are sold?

Employee position

If the shares have been taxed under the ESS rules, then any subsequent sale of the underlying shares usually has CGT consequences (see Question 9). The CGT cost base of shares is equal to the market value of the shares at the time the deferred taxing point occurred.

If the 30 day rule applies (see Question 7), then the sale of the shares does not have CGT consequences.

Employer position

There are no tax consequences.

 

Phantom or cash-settled share plans

16. What types of phantom or cash-settled share plan are operated in your jurisdiction?

Phantom or cash-settled plans are generally used by companies to incentivise senior executives, rather than employees generally. These are typically structured as a right to receive a cash payment at some point in the future, with the amount of the payment determined by reference to the share price increase over that period. Importantly, the employee does not acquire a beneficial interest in the reference shares or a right to acquire a beneficial interest in those shares.

Some companies also prefer to use a simple bonus plan, rather than a phantom or cash-settled plan, if the aim is to offer cash-based rewards to employees. This can be simpler from a regulatory perspective, and easier to understand and implement from a tax perspective. Cash-based plans are also particularly popular in private company contexts as they avoid the complications that can arise where there is little or no market for the company shares when an employee wants to exit from their investment.

Following the tax changes in 2009, there has been an increase in the use of so-called "indeterminate right" plans, where the employer has a discretion to grant a right to acquire either shares in their employer or a cash payment at vesting.

Grant

17. What rules apply to the grant of phantom or cash-settled awards?

Phantom or cash-settled awards may be derivatives for the purpose of the Corporations Act, as the amount to be paid to participants is determined at a future date by reference to the value of something else. The offer of a derivative generally requires disclosure (that is, a product disclosure statement) and triggers financial services licensing obligations. However, phantom or cash-settled awards generally benefit from the relief provided by the EIS Class Orders, subject to satisfaction of the relevant requirements.

From a tax perspective, it is generally accepted in the market and by the Australian revenue authorities that phantom or cash-settled awards are simply rights to receive an employment bonus and that the payment is taxable as ordinary income only when it is received by the employee. The specific ESS tax rules do not apply and the employer is not subject to fringe benefits tax.

Discretionary/all-employee. An offer to participate in a phantom share plan can be awarded on a discretionary basis to particular members of personnel or to all employees, provided that the offers are lawful.

Non-employee participation. Participation in phantom share plans can be offered to non-employee directors and consultants.

Maximum value of awards. There is no maximum award value that can be granted under a phantom share plan, either on a per-company or per-employee basis.

 
18. What are the tax and social security implications when the award is made?

Based on market practice and our understanding of the current views of the Australian Taxation Office (ATO), there will not be tax consequences when a phantom or cash-settled award is made.  However, this outcome is very much dependent on the structure of the plan and the awards, and many employers apply to the ATO for a binding ruling to confirm the tax treatment of phantom of cash-settled awards.

Vesting

19. Can phantom or cash-settled awards be made to vest only where performance or time-based vesting conditions are met?

Phantom or cash-settled awards can be made to vest only where performance or time-based vesting conditions are met and it is market practice to do so.

 
20. What are the tax and social security implications when performance or time-based vesting conditions are met?

Based on market practice and our understanding of the current views of the Australian Taxation Office (ATO), there will not be tax consequences when vesting conditions attaching to phantom or cash-settled awards are met.  However, again, this outcome is very much dependent on the structure of the plan and the awards, and many employers apply to the ATO for a binding ruling to confirm the tax treatment of phantom of cash-settled awards.

Payment

21. What are the tax and social security implications when the phantom or cash-settled award is paid out?

A taxing point occurs when payments are made to the employee in respect of phantom or cash-settled awards.

The paying entity (which may or may not be the employer) must withhold an amount from the payment under the PAYG tax withholding regime, and send the withheld amount to the Australian Taxation Office (ATO).

Employee must include the gross amount of the payments in their personal tax returns and pay tax at their marginal rate through the self-assessment regime. They receive a credit for the amount withheld at the time of payment.

If the employer is liable, it will have to pay payroll tax on the amount of the payment, as the payment is treated as taxable wages.

 

Corporate governance guidelines, market or other guidelines

22. Are there any corporate governance guidelines, market rules or other guidelines that apply to any employee share plan?

The Listing Rules and the Australian Securities and Investments Commission (ASIC) Regulatory Guides set out market rules and guidelines that apply, among other things, to employee incentive schemes.

Listing Rules. The Listing Rules:

  • Allow companies to create a lien over shares issued under an employee incentive scheme if an amount in relation to the shares is still due from participants.

  • Provide an exception for shares issued under an employee incentive scheme to the prohibition on issuing more than 15% of the relevant company's issued capital in a 12-month period, where certain conditions are met.

  • Require the approval of shareholders before new shares are issued to directors or options or rights to subscribe for new shares are issued to directors, their associates or any person who, in the ASX's opinion, has a relationship with either the company, a director or an associate of a director.

The Listing Rules apply to all companies listed on the ASX.

ASIC Regulatory Guides. ASIC has published regulatory guides setting out ASIC's policy in relation to employee incentive schemes and the circumstances in which ASIC will exercise its discretionary powers to grant special relief from the disclosure and financial services licensing obligations.

 

Employment law

23. Is consultation or agreement with, or notification to, employee representative bodies required before an employee share plan can be launched?

Consultation or agreement with, or notification to, employee representative bodies is not required before an employee incentive scheme can be launched, unless it is required by an employer's specific industrial instrument (which is unusual).

 
24. Do participants in employee share plans have rights to compensation for loss of options or awards on termination of employment?

Participants in employee share plans do not generally have rights to compensation for loss of options or awards on termination of employment. However, legal claims are sometimes made or threatened, (for example, for misleading and deceptive conduct). If a company wishes to make a payment to an employee for lost options or awards on termination of employment, it will need to consider whether the termination benefits restrictions in the Corporations Act apply. These restrictions prohibit companies giving termination benefits (including compensation for loss of options or awards on termination of employment), to persons holding a managerial or executive office, except where a relevant exemption applies (which includes a monetary cap) or shareholder approval has been obtained.

 

Exchange control

25. How do exchange control regulations affect employees sending money from your jurisdiction to another to purchase shares under an employee share plan?

Exchange control regulations apply in very limited circumstances and are unlikely to affect employees sending money outside Australia to purchase shares under an employee share plan (although transactions involving countries such as North Korea, Zimbabwe, Burma, Iraq, the former Yugoslavia and countries subject to UN sanctions require specific advice). Cash transactions involving more than A$10,000 must be reported.

 
26. Do exchange control regulations permit or require employees to repatriate proceeds derived from selling shares in another jurisdiction?

There is no requirement to repatriate proceeds derived from selling shares in another jurisdiction.

 

Internationally mobile employees

27. What is the tax position when an employee who is tax resident in your jurisdiction at the time of grant of a share option or award leaves your jurisdiction before any taxable event affecting the option or award takes place?

Non-resident employees are subject to Australian tax on the portion of the discount that relates to their Australian service periods, while the portion that relates to foreign service periods is generally exempt. The employee must determine the tax market value of the option or award at the time that the taxing point occurs, and then attribute that amount to the number of days in the vesting period that relates to the employee's Australian service.

A CGT event also generally happens if an individual ceases to be an Australian tax resident while holding a CGT asset (which includes share options or awards), with a capital gain if the market value of the asset when residency ends is more than the asset's cost base. However, this does not apply if the share options or awards are subject to the tax-deferral rules and a deferred taxing point has not yet happened (see Question 5, Employee position).

The provider has tax reporting obligations in relation to the part of the discount that is subject to Australian tax (see Question 31).

 
28. What is the tax position when an employee becomes tax resident in your jurisdiction while holding share options or awards granted abroad and a taxable event occurs?

The entire gain is subject to Australian tax and the employee cannot exclude that part of the gain relating to the period when they were working overseas as a foreign resident. This is because the employee, as an Australian tax resident, is taxable on all sources of income, whether in Australia or not.

The employee is generally entitled to claim a foreign income tax offset for any foreign taxes paid in relation to the gain, which can then be used to reduce his Australian tax liability on the foreign-sourced portion.

The provider has tax reporting obligations with respect to the awards (see Question 31).

There are rules for temporary residents (a special class of tax residency) which can affect the tax treatment of employee share awards.

 

Securities laws

29. What are the requirements under securities laws or regulations for the offer of and participation in shares under, and participation in an employee share plan?

Under the Corporations Act, two separate regimes of disclosure regulation apply to offers under an employee incentive scheme.

Offers of shares, and options to subscribe for newly issued shares, are categorised as offers of securities and are governed by Chapter 6D of the Corporations Act. Options satisfied by the transfer of existing shares (for example, through an employee benefit trust) or rights to receive shares at a future date, as well as rights under phantom plans, are categorised as financial products and are subject to a separate disclosure regime under Chapter 7 of the Corporations Act.

An offer of securities or financial products to persons located in Australia at the time of the offer requires the issuer to provide a disclosure document, being a prospectus under Chapter 6D or a product disclosure statement under Chapter 7, and hold an Australian financial service licence (AFSL), unless a relevant exemption or other relief applies.

 
30. Are there any exemptions from securities laws or regulations for employee share plans? If so, what are the conditions for the exemption(s) to apply?

Corporations Act. The Corporations Act provides separate exemptions from the disclosure and AFSL requirements for offers of securities and financial products.

The exemptions from the disclosure requirements for an offer of securities include where:

  • The offer is made to senior managers, their spouses, parents, children or siblings or bodies corporate controlled by any of these persons.

  • The offer is personal, it is made to fewer than 20 people and less than A$2 million will be raised.

  • The offerees meet the requirements of being classified as sophisticated investors.

The exemptions from the disclosure requirements for an offer of financial products include where the offerees meet the requirements of being classified as wholesale clients.

One way to be classified as a sophisticated investor or wholesale client is where the offeree's net assets or gross income exceeds certain levels and the offeree holds a certificate to this effect provided by a qualified accountant within the preceding two years.

EIS Class Orders. As noted above, the Australian Securities and Investments Commission (ASIC) has granted class order relief from the disclosure and financial services licensing requirements where certain conditions are met. The requirements of the EIS Class Orders include that the offer documents incorporate certain information and undertakings and that a notice of reliance is filed with ASIC within one month of a body's first reliance on either EIS Class Order in relation to a particular employee incentive scheme. There are different requirements that apply in the case of offers being made by listed and unlisted companies. Specific advice should be obtained to ensure that all requirements are satisfied.

Special relief. ASIC has the power to grant special relief. A key concern for ASIC in considering whether to grant such relief will be whether the relevant plan provides for mutual interdependence between the employees and employer.

Alternatives to a prospectus. Instead of a prospectus, companies can issue an offer information statement if the funds to be raised, when added to previous amounts raised by the company and its related bodies corporate, do not exceed A$10 million.

 

Other regulatory consents or filings

31. Are there any other regulatory consents and filing requirements and/or other administrative obligations for an offer of shares under, and participation in, an employee share plan?

The provider of ESS interests must report to both the employee and the Australian Taxation Office (ATO) using prescribed forms. This does not apply to phantom or cash-based awards, although the entity that makes the payment to an employee in respect of those awards must report the amounts to the employee and the ATO on PAYG Payment Summaries.

Under current ATO practice, ESS reporting is only required after the tax year in which the employee is taxed and both:

  • An ESS Statement must be given to the employee by 14 July following the end of the tax year and the statement must include the provider's estimate of the tax market value of the ESS interest.

  • An Annual Report must be given to the ATO by 14 August following the end of that tax year and the report must include details of each relevant employee and details of the plan (including the amount of any discount).

The provider can authorise an agent to discharge its reporting obligations on its behalf (for example, a local Australian subsidiary).

As employers that meet the relevant thresholds must pay payroll tax on ESS interests, these must be included in their payroll tax returns as taxable wages. The amount of any cash payments under a phantom or cash-settled award must also be included in the returns.

It is possible to have the ATO confirm the tax treatment of an offer of ESS interests by applying for a class ruling on behalf of eligible employees. A favourable ruling is then binding on the Commissioner of Taxation and can be relied on by employees when dealing with their tax compliance and payment obligations. Employers typically apply for a ruling if there are uncertainties about how the tax laws apply to the features of the offer (a common issue is whether an award is at a real risk of forfeiture so that tax deferral applies) and/or where the offer is being made to senior executives or to a large number of employees and a binding ATO ruling will be viewed favourably from an employee goodwill/HR perspective.

 
32. Are there any data protection requirements or obligations for an offer of shares under, and participation in, an employee share plan?

Organisations with an annual turnover of more than A$3 million, commonwealth government agencies and some small business operators must comply with Australia's Privacy Act 1988 (Cth) (Privacy Act), , including the Australian Privacy Principles when collecting, storing, giving access to, correcting, using and disclosing personal information.

However, acts or practices of employers (excluding agencies) are exempt from the operation of the Privacy Act when the act or practice is collecting, storing, or using personal information in an employee's record that is directly related to the current or former employment relationship between the employer and the individual and an employee record relating to the individual. This exemption does not apply to related bodies corporate of the employer.

Restrictions also apply to handling employees' tax file numbers (TFNs) under the Tax File Number Guidelines 2011 and the Privacy (Tax File Number) Rule 2015 (TFN Rule). The TFN Rule regulates the collection, storage, use, disclosure, security and disposal of TFNs. Among other obligations, recipients (including employers) of TFNs must take reasonable steps to:

  • Protect the information from misuse and loss, and from unauthorised access, use, modification or disclosure.

  • Ensure access is restricted to specific individuals.

  • Securely destroy or permanently de-identify the information when no longer required by law to be retained or necessary for a purpose under taxation law, personal assistance law or superannuation law.

 

Formalities

33. What are the applicable legal formalities?

Translation requirements. There is no specific legal requirement for plan documents to be translated into English. However, it is doubtful that a binding agreement could be entered into where an employee was unable to understand the terms of the offer. Further, it is unlikely that an offer document in a language other than English would be regarded by the Australian Securities and Investments Commission (ASIC) as clear, concise and effective where offers are made in Australia. In appropriate circumstances, ASIC can take regulatory action if it believes that an employer is engaging in misleading or deceptive conduct or conduct that is likely to mislead or deceive.

E-mail or online agreements. Employees can enter into binding agreements to participate in employee share plans electronically. The key is that it is clear that the employee has unequivocally agreed to the terms of the employee share plan and that the issuer retains evidence of this. ASIC guidance in relation to electronic documents requires that the offer documents are easy to access, capable of being saved and printed and appropriately protected from alteration or tampering. There is also a requirement to make hard copy offer documents available on request.

Witnesses/notarisation requirements. Legal agreements are generally not required to be witnessed or notarised.

Employee consent. An employee's authorisation of deductions from wages or salary is required and an employee must consent to become a member of a company.

 

Developments and reform

34. Are there any current trends, developments and reform proposals that have or will affect the operation of employee share plans?

Trends and developments

Public and private organisations continue to see employee share awards as a valuable tool to incentivise employees on a short and long-term basis, although they are now more prudent in how they structure their equity compensation arrangements following the global financial crisis.

Increasing shareholder activism has meant that incentive packages are now under much closer scrutiny, particularly for senior executives. Following the 2009 tax changes, many organisations shelved their share option plans in favour of performance right plans, due to the punitive tax treatment that applied to the former, and despite the pre-2009 position being restored so that options are once again only taxable at exercise, there has not been a widespread "re-embracing" of these types of plans (at least by purely Australian-based corporate groups). However, some multinational organisations have begun extending their global option plans to their Australian-based employees.

Reform proposals

The Australian Securities and Investments Commission (ASIC) has indicated that it intends to release a revised version of the EIS Class Orders to ensure that the compliance requirements are clear. At the time of writing, the date for the release of the revised EIS Class Orders is still to be confirmed.

 

Online resources

ComLaw website

W www.comlaw.gov.au

Description. ComLaw has the most complete and up-to-date collection of Commonwealth legislation and includes notices from the Commonwealth Government Notices Gazette from 1 October 2012. It is an official website of the Commonwealth government.

Australian Securities and Investments Commission (ASIC) website

W www.asic.gov.au

Description. This is the official website for ASIC, the financial regulator for Australia. It includes up-to-date versions of, for example, class order relief and regulatory guides granted or issued by ASIC.

Australian Taxation Office (ATO) website

W www.ato.gov.au

Description This is the official website of the ATO, the regulator responsible for the collection and administration of Australian's federal tax system. It includes all federal tax laws, all of the ATO's public rulings, tax case law, and compliance-related material. It contains information for businesses, individuals, and tax and superannuation professionals.



Contributor profiles

Hamish Wallace, Partner

Minter Ellison, Sydney

T +61 2 9921 4596
F +61 2 9221 8223
E hamish.wallace@minterellison.com
W www.minterellison.com

Professional qualifications. New South Wales, 2002

Areas of practice. Employee incentive schemes; corporate and international tax; employment tax.

Other qualifications. Director of the Global Equity Organisation

Recent experience

  • Advised SABMiller on the rollout of its global incentive plan to Australian employees following the A$10 billion acquisition of the Foster's Group, including obtaining clearances from the Australian Taxation Office.
  • Advised Xstrata on the tax implications for its Australian employees and shareholders of its £50 billion merger with Glencore International plc, including obtaining clearances from the Australian Taxation Office.
  • Advised Invesco Limited on the Australian tax implications for its employees incentive programmes of the re-domicile to Bermuda and re-listing on the NYSE.

Professional associations/memberships. Member of the Taxation Institute of Australia.

Aidan Douglas, Senior Associate

Minter Ellison, London

T +44 20 7448 4807
F +44 20 7448 4848
E aidan.douglas@minterellison.com
W www.minterellison.com

Professional qualifications. New South Wales, 2008 (London-based)

Areas of practice. Employee incentive schemes; mergers & acquisitions; corporate and commercial; securities law and financial services regulation.

Recent experience

  • Advised a broad spectrum of companies, from major European and US financial institutions and corporations through to start-ups, on Australian securities law and financial services regulation in relation to employee incentive schemes, including applications for special relief from the Australian Securities and Investments Commission.
  • Advised Micro Focus International plc on Australian law aspects of its US$1.2 billion acquisition of Attachmate Group Inc.
  • Advised IGas Energy plc on Australian law aspects of its A$211.5 million acquisition of Dart Energy Limited.

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