An employee share scheme(ESS) is a form of remuneration that allows employees to purchase shares in their company at a discounted rate.
The discounts are usually offered through salary sacrifice or offer schemes, meaning they are tax-deductible for the employee.
Employee Share Schemes are governed under subsection 83A-10(1) of the Income Tax Assessment Act 1997 (Cth). Under this provision, ESS can be divided into two categories: Approved and Unapproved.
Some common benefits associated with participation in an ESS include ownership, increased skill sets, and potential financial gains. It has also been shown that companies offering ESSchemes typically receive higher levels of commitment from staff, leading to greater productivity.
Employee Share Schemes are administered by employees purchasing shares in the company they work for at a discounted rate. Under Subsection 83A-10(1) of the Income Tax Assessment Act 1997 (Cth), ESS can be divided into Approved and Unapproved Schemes.
An Unapproved Scheme under s83A-10(1) has no limit to the number of participants in the scheme, no restrictions on when share acquisitions can occur, and no limitations on when share sales must occur for a discount to apply.
This type of scheme is designed to provide an immediate tax deduction for employees who take part in the scheme without any requirement for capital gains tax to be paid on a future sale of the shares.
An Approved Share Schemes is defined under subsection 83A-10(3) as a scheme that restricts the purchase of shares to only certain employees approved by management and has specific time periods where share sales must occur in order for a discount to apply.
The key feature of this type of scheme is that it provides tax deductions to employees when purchasing their shares and significantly reduces capital gains tax when selling them. The main restriction is the requirement for strict compliance to meet eligibility requirements and time limits.
A company may offer an ESS in whatever form they wish, but if their plan does not comply with the requirements specified by section 83A-10 of the Income Tax Assessment Act 1997, it will be deemed an Unapproved Share Scheme.
For example: If a company offers shares at a discounted price to employees outside of restricted periods or for reasons other than employment-related criteria, their scheme may be considered unapproved.
An employee share scheme can usually only take effect when shares are purchased from existing shareholdings rather than before purchase. The discount at which employees purchase shares should reflect the fair market value of the shares on the issue immediately before the purchase.
Typically, Employee Share Schemes have a 1-5 year maturity period where varying levels of taxation occur upon sale or disposal of shares acquired through an approved or unapproved Employee Share Scheme.
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