The government’s changes to employee share schemes have stalled. Is it all bluff and bluster?

In the prevailing tight labour market where non-cash remuneration is a key tool employers can use to attract, retain and motivate key employees, the stalling of the federal government’s Employee Share Ownership Plan (ESOP) draft legislation, could not come at a worse time. 

While SMEs are scrambling to recover from the pandemic, startups are also now hampered in the ability to implement an ESOP to reduce the burden of cash, and lower the barrier of attractive and retaining quality staff. 

Either way, recovery and innovation in Australia are being significantly stifled until this legislation can get back on track, progress and be enacted.

How are employee share schemes used?

ESOPs are used by employers to attract, retain and motivate employees by issuing shares, share options, interests in shares or other benefits resulting from shares. 

In the SME market, they are often used for immediate-term productivity and retention in the longer term. In succession planning and exit strategies, employee share schemes (ESS) can be great economic multipliers and create a win-win-win situation for employees, founders and the business.

However, the uncertainty around the finalisation of the new rules has delayed some plans while the predominantly positive changes to ESOPs put forward by the government’s draft legislation last year have stalled.

Although some of the proposed changes had gone back into consultation through review of the draft legislation, this consultation period ended in August, and is it now unlikely they will proceed prior to an upcoming federal election.

ESS for the better

To recap, the government had proposed 34 tax and regulatory changes that would make it easier to implement ESS, so unsurprisingly, many of the recommendations were well received by advisers, startups and even opposition parties.

The recommendations included proposed tax reforms, such as the elimination of the employment taxing point for tax-deferred ESS for all companies, and would apply to ESS interests issues after July 1, 2022 at the earliest.

These changes would not only increase the uptake of ESOPs by startups but also their effectiveness. They would also increase further tax concessions and benefits, such as raising the limit on tax-free shares and salary sacrifice amounts.

The government also proposed regulatory reforms that would see the value limit of eligible financial products that can be offered by unlisted companies in a 12-month period increased from $5,000 to $30,000 per employee; a relaxation of requirements to lodge disclosure documents; and the consolidation of exemption and class order relief from some obligations under the Corporations Act 2001.

What can be salvaged?

At a critical time in their history, small businesses and startups are being left in limbo. They are aware there are slated changes to employee share schemes which will make it easier to use them, but these changes have yet to take effect.

Should they wait until the changes come in? Would a new government proceed with the changes or some other changes? Could they be amended again based on the recent review and consultation?

All these questions create uncertainty and small businesses hate uncertainty. They have already dealt with extended COVID lockdowns and restrictions, along with changes to legislation and rules governing their operations. But this is the worst kind of uncertainty: promised changes that are not enacted. The uncertainty means they cannot move forward in their recovery plans, their growth plans or launch plans. 

A cynic would say the changes were announced with no intention to actually implement them but to score political points. It is time this government focused less on sales and marketing and more on providing the certainty SMEs and startups need to thrive.