What is a start-up?

Under the new ESS legislation amendments made effective from 1 July 2015 specific taxation concessions to ESS participants if employed and offered by a “start-up company”.

A start-up company is defined as:

  • The company must not be listed on any securities exchange;
  • All entities in the corporate group must have been incorporated for less than 10 years;
  • Aggregated annual turnover (prior year) must not exceed a $50 million; and
  • The employing company must be an Australian resident company.

If your company fits within these requirements then concessional ESS opportunities are available for all participating employees.

What are the tax concessions?

Firstly, the discount provided for eligible ESS interests will not be taxed under the general ESS provisions but under the specific start-up concessions.

There will no tax on grant of the ESS interest and gain (or loss) on disposal of the rights or shares will be assessed under the capital gains tax (CGT) regime. Under current taxation legislation a 50% discount applies to assets acquired and held for more than twelve (12) months. Under the start-up concession the period of ownership of a share acquired on exercise of a right is taken to have started when the right was acquired.

In addition, the valuation methodology and application for start-up companies has been simplified and are concessional.

 

This means an ESS benefit may be one of the most cost and tax effective benefits available to employees of start-up enterprises, if properly and judiciously applied.

How can we help?

The Australian Taxation Office (ATO) in encouraging access to the start-up concession have provided free of charge a set of standard documents, including a model option plan, a standard letter of offer and a guide to “safe harbour” valuation methods. This significantly reduces the cost burden on companies wanting to access this benefit.

Where C+A can complement this basic offering is providing help in solving the following issues:

  • Getting the offer design right is not necessarily straight forward. Who should participate and why? How many equity interests should be offered now and in future? What performance conditions, if any, should be imposed? What other conditions should be imposed, if any?
  • What about compliance with the Corporations Act, employment law and payroll tax?
  • How should the benefit be communicated to ensure the ESS benefit provided is appropriately valued by participants?
  • How do we transition ESS offers over time to ensure current and future employees have appropriate and proportional interests?
  • How do we administer the plan to meet all the reporting obligations?