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ESOP legislative reform measures

To reform ESOPs requires a single, integrated package of reforms implemented, perhaps step-by-step, with the aim of constructing a fully articulated legislative and regulatory environment in which to cultivate a widespread and deeply-rooted employee ownership culture.

a. Replace the separate Exempt and Deferred plans with a single structure taxed on the basis of consistently applied principles.

To break down the tax bias in favour the Exempt Plan, to encourage employees to take up greater amounts of equity than an Exempt plan can deliver, and to introduce fairness and consistency into the taxation of the Deferred Plan, amend Division 83A to provide for a share plan in which:

(i) the first $1,000 (or some higher amount) is tax exempt (with CGT on any growth); and

(ii) any amount above $1,000 (or some higher amount) to be tax deferred until shares are sold or options exercised (i.e. no 7 year rule) at which time the discount given at grant be taxed at marginal Income Tax rates and the growth to be taxed as a capital gain with the benefit of the CGT discount.

b. Exempt ESOPs from existing prospectus requirements.

ESOPs should be exempted by legislation from the prospectus provisions of Corporations Law. The necessary investor protection can be achieved by a minimum prescribed disclosure regime for ESOPs (see Appendix B).

This new prescribed regime could be achieved either by ASIC exercising its existing powers of exemption and modification, or by Government direction to the ASIC in relation to the exercise of these powers, or by legislative reform.

c. Widen the definition of equity given in Division 83A.

Division 83A should enable an listed-company employer to offer an employee any instrument, or form of equity, or right thereto, in the employer’s company, that entitles the employee to:

1. Voting rights,
2. Dividends, and
3. An entitlement to capital.

An unlisted company employer should be able to offer an employee any instrument, or form of employer company equity, or right thereto, that offered the employee at least 2 and 3 (above).

e. Increase the 5 per cent Rule to 10 per cent

The proposed new limit would go some of the way to matching international practice and would pave the way for owners to use ESOPs to sell down businesses to their employees as part of “succession planning” strategy.