Employee Share Scheme (ESS) – updates to disclosure requirements, taxing points and penalties

There are several changes in the wind for Australian ESS regulation which have come into effect or will do so in the coming months. These include:

• the removal of a key taxing point for ESS participants;

• streamlining of employer disclosure requirements; and

• ramping up the penalty regime associated with disclosure requirements.

Also in the works are changes announced in the Federal Budget for 2022-23.

Given these changes, and in the background of what is being dubbed the “Great Resignation”, it may be a good time to implement an ESS to bolster your business’s employee remuneration and incentive strategy.

Removal of a taxing point for employees

Generally speaking, an employee may have to pay tax in connection with shares or options under an ESS if certain events occur. One such event was when the employee left the business. This potentially meant an employee was paying tax on something that they had not received any real benefit from.

From 1 July 2022 onwards, ESS participants will only be taxed when:

• there is no risk of forfeiting the ESS interests and any restrictions on their sale are lifted;

• in the case of share options, the employee has exercised them and there is no risk of forfeiting the resulting share and no restriction on disposing of that share; or

• 15 years after the ESS interests were granted.

Streamlining the disclosure regime

There are certain disclosure and reporting requirements that employers need to comply with in relation to ESSs. These requirements are found in various legislation, regulation and class orders, which made it difficult for employers to work out what they should be doing.

Under the streamlined regime, which comes into effect from 1 October 2022:

• Disclosure can be required at two different points in time in relation to an offer:

  • upfront, before any shares, options or rights are issued; and

  • in relation to options and incentive rights, before those options or incentive rights are exercisable.

• Specific details now need to be included in offer documents. This includes, amongst other things, making specific risk disclosures and disclaimers.

• If payment is required and the company is not listed, the company will need to provide additional information or disclosures. This includes:

  • financial information about the company;

  • a valuation report;

  • a statement of solvency; and

  • where ESS interests are subject to ancillary arrangement, such as an employee trust or a loan or contribution plan, details of those arrangements.
    
    Note that copies of these arrangements don’t need to be provided but must be made available on request.

• If no payment is being required to receive the ESS interests, then only the offer terms need to be provided.

Accompanying the streamlining of the disclosure regime are changes to the penalty regime. Of particular note is that misleading or deceptive statements (or omissions) in offer and disclosure material can lead to penalties and up to 5 years imprisonment. We expect that ASIC will look to strictly police the disclosure regime, especially given their general stance on enforcement in recent times (ASIC imposed $84.3 million in civil penalties during July to December 2021 alone).

Feel free to get in touch with a member of our Corporate & Commercial Team if you require any further assistance.

Authors: Eric Kwan & Robert Lee

Contributing partner: Greg Blewitt