The implementation of employee share schemes could be expanded and the red tape surrounding them relaxed under policy reforms being considered by the Australian Securities and Investments Commission.
While both major political parties profess support for the idea of employee share ownership, there is a deep suspicion that these schemes are more likely to be used to provide senior employees with tax effective remuneration. At the same time, there is an expectation that senior employees will have “some skin in the game”.
While there is no systematic collection of data on employee share schemes, our research has shown tax and regulatory frameworks are key drivers of the design of employee share schemes.
There’s also a growing group of Australian startups lobbying the government to change the tax treatment of employee share option plans.
The regulator has released a consultation paper which recommends more companies be able to offer employees shares without the need to produce a formal disclosure document, as well as providing relief from other provisions in the Corporations Act.
Many employers will embrace the changes proposed by ASIC, which has proposed expanding the range of financial products which can be offered; allowing the use of trusts to hold shares for employees as well as direct ownership; expanding the types of entities that can offer the financial products and extending who can participate in these schemes to include contractors, casual employees and non-executive directors.
Is the current system broken?
Shares could be provided to employees without the sort of disclosure normally required by companies under ASIC’s proposal. Such disclosure is viewed as protection for investors so they can readily assess the merits of the securities being offered. So there needs to be a good reason to dispense with it.
The paper says there is “a large body of research on the benefits of employee ownership….[including] improved business performance, greater employee engagement, and commitment, innovation and reduced absenteeism”.
But none of the research referred to actually supports that proposition. In fact, there is no empirical evidence to support most of the propositions often put forward to argue the case for employee share schemes. Without this evidence it seems odd to provide encouragement for schemes to be offered by permitting less disclosure.
Will the changes make for more employee share schemes?
At present the ability to participate in employee share schemes is effectively restricted to employees of listed entities. Unlisted companies face a major hurdle if they wish to implement such schemes, namely the need to produce a disclosure document for employee investors. An alternative document, an Offer Information Statement, requires an audited financial statement and this has proved too onerous for most unlisted companies.
The proposal makes a modest concession to these difficulties by permitting unlisted entities to offer up to A$1000 annually to employees, but only if the employee provides no or token monetary consideration. Some prescribed information must be provided in or with the offer. This is fairly minimal but may suit the small offerings permitted. Beyond that relief, other offers to employees of unlisted entities will face the same hurdle as before.
The position of unlisted entities presents a conundrum: the current rules discriminate against unlisted entities, however providing an exemption from the disclosure requirement means that employees of unlisted entities may not have sufficient information to make the decision whether to take up shares.
Tax hurdles remain
Employers need to take into account the tax consequences of providing employees with shares or options, including the conditions that must be satisfied to access relief. The provision of non-cash benefits to employees, including any discount on the issue of shares will be subject to tax. However, for employees earning less than A$180,000 per annum there is a tax exemption of discounts on shares or rights in the employer up to A$1000 per annum.
This may suggest some intended symmetry between the disclosure obligations and the tax concessions, but that appears to be where the similarities end. The tax legislation allows a salary sacrifice of A$5000 but presumably this will require a full disclosure document and there are still a range of conditions that must be satisfied to obtain tax relief. The limit of 5% per employee makes it difficult for employees to acquire significant interests without incurring an immediate tax liability.
The A$1000 tax exemption was introduced in 1997 and as time goes on the real value is being eroded. An employer would need to ask whether it’s worth satisfying a significant number of conditions and providing prospectus-like information just to be able to offer employees A$1000 of discount.
What’s really needed is the collection of data by a government agency about the types of employee share schemes and more research into the benefits of such schemes. There is also a need for a more nuanced approach to tax and regulation of such schemes, something the Coalition flagged in the lead up to the election.
Rather than provide an exemption from the need to disclose it may be more appropriate for the Corporations Act to provide for a separate disclosure document for employee share or incentive schemes. This could require certain information about the entity and the investment, but without the requirement for unlisted entities to provide an audited set of accounts. This would at least bring us into line with the UK and the US.