Glossary of Terms
Glossary of Terms Employee Share Ownership – Understanding the Language
Defined below is a list of terms commonly used in reference to Employee Ownership and particularly Employee Share Schemes (ESS) i.e. share ownership plans for employees / ESOPs (Employee Share Option Plans or Employee Stock Ownership Plans as they are commonly referred to as in the US).
Adjustable Taxable Income
This is all an individual’s income, from all sources (not just remuneration or salary) plus Fringe Benefits less certain elements. This is defined more fully by the ATO.
Aggregated Turnover is your annual turnover plus the annual turnovers of any business entities that are your affiliates or that are connected with you.
This is the Australian Securities & Investments Commission.ASIC provides Regulatory Guidance about Employee Share Schemes RG49, that gives overall guidance and then two Legislative Instrument (Class Order) exemptions that exempt listed and unlisted plans from the Prospectus Filing requirements in s706 of the Corporations Act.
ASIC Legislative Instrument (Class Order) CO 14/1000 (listed bodies)
ASIC Legislative Instrument (Class Order) CO 14/1001 (unlisted bodies)
These Legislative Instruments (Class Orders)s are an exemption for Employee Share Ownership Plans or Equity Share Plans from the Disclosure and Prospectus Filing requirements in the s706 of the Corporations Act, Financial Services Regulations (FSR) including licensing and anti-hawking relief and relief from Product Disclosure Statements.
The conditions contained in the Legislative Instrument (Class Order) relate mostly to information that should be contained in the ‘Offer Document’ or communication material provided to the employees to whom an offer is made. The listed exemption is usually for a Broad Based employee plan, it has no limits on numbers or dollar caps (unlike s708(1) of the Corporations Act) although there is a issued capital limit of 5% over the 3 preceding years. For unlisted companies there is a cap of $5,000 per employee per annum, a 20% issued capital limit over a rolling 3 year period and a requirement for Options that they can not be exercised until the company is listed. You can find out more details in one of our blogs.
An Associate for the purposes of Division 83A (ITAA), includes a relative of the employee, or a company in which the employee holds shares for the purposes of Division 83A (ITAA). An Associate of an employer company includes a majority shareholder, partner, or a related company within the employer group. An Associate can be a person, a company or a Trustee of a Trust under which the employee or employer benefits.
ASX or Australian Stock Exchange
Australian Stock Exchange Limited (ACN 008 624 691).
You have the Beneficial Interest in shares, Rights or Securities when you are the owner but the shares rights or Securities are registered in the name of someone else who is holding them for you, this is usually a Trust.
Individuals or companies who have an interest in assets held by a Trustee.
A Bonus Share is a free share given to current company shareholders, based upon the number of shares that the shareholder already owns. While the issue of bonus shares increases the total number of shares issued and owned, it does not change the value of the company. It can also refer to ESOPs/Share plans where the Dividend is reinvested in more shares but not through a traditional DRP.
Broad Based Employee Ownership refers to ownership by a broad cross-section of employees, including rank-and-file employees, generally through a formal plan offered by the employer.
Capital may be used in a number of senses. For example, it may describe the issue of shares, or the value of all issued shares, reserves and undistributed profits that are retained in a company to fund its operations, or the cash, goods or infrastructure a business uses to generate income. The term capital is distinct from the terms capital gain or capital loss which are used in the context of Capital Gains Tax.
CGT or Capital Gains Tax
A tax imposed on, amongst other things, the gain from the disposal or deemed disposal of an asset (including employee shares or equity acquired through an ESOP) which is owned by an Australian taxpayer. Any net capital gain that accrues to a taxpayer is included in the assessable income of the taxpayer, although certain concessions are available to individuals and Trusts that have held the relevant asset for more than 12 months which usually results in only half of any capital gain to be assessed (note for the Sstartup Concessions this 12 month period does not apply to Options).
Class orders (Legislative Instruments)
Before 2015 Legislative Instruments were referred to as Class Orders. Legislative Instruments usually apply to a class of persons who carry out a particular activity in certain circumstances, e.g. timeshare scheme operators, corporations conducting market research, operators of managed investment schemes based on syndicate arrangements.
Corporations Act 2001 (Commonwealth). This Act is relevant for employee share plans (ESOPs) in a number of different ways, the Prospectus Filing provisions and exemptions in s706/8, Self Acquisition provisions in s259, Financial Assistance s260, Insider Trading s1002 onwards and s200 Termination Payments (for managerial and executive officers).
The acquisition cost or deemed cost of the Shares or Options held in an Employee Equity Plan. This is the base from which any gain is calculated.
Put off or delay to a later date.
Deferred Taxing Point – ESS
The time when tax deferral ends and a Share still held under a Share plan is taxed or subject to income tax. Under section 83A-115/120, this time is basically the earliest of (1) when the real risk of Forfeiture ceases on the Share (2) when the employee ceases employment (3) when any Genuine Disposal Restriction on the Share/Right/Option ceases (this restriction needs to a trading restriction required by the Company or law or a restriction that is applied when the equity is offered) (4) 15 years after acquiring the Share/Right/Option. If there is no real risk of Forfeiture there is usually no tax deferral on a Share unless it is a Salary Sacrifice scheme and this situation 2 – 4 applies instead. For a Right or an Option 2 – 4 applies provide the general conditions are met, see section 83A-45.
The tax concession in Subdivision 83A-C (s83A – 100 onwards) which defers income taxation of discount and gain on ordinary shares acquired by an employee under an Employee Share Scheme (ESS) for up to 15 years.
Deferred Share Plan
As provided for under Division 83A (ITAA), a share plan designed to take advantage of the Deferral Concession. For more information on Division 83A, see our ESP outline page.
The reduction of the percentage of share ownership held by existing shareholders in a company by issuing shares or rights to shares under the ESOP.
You can Dispose of your Shares in the following ways: selling them; giving them away; transferring them to a spouse as the result of a breakdown in your marriage or relationship; through share buy-backs; through mergers, takeovers and demergers; and, because the company goes into liquidation. You are likely to make either a Capital Gain (or capital loss) when you dispose of your shares.
The provision of information in compliance with the rules prescribed in the Corporations Act, 2001, specifically the Prospectus Filing provisions and disclosure documents in ss706 – 716.
A share is acquired at a discount if it is acquired at less than the Market Value of that share. The Market Value is not necessary the closing or most recent price quoted on the Securities exchange so if you do not/do want to fall within Division 83A it is important that you are mindful of what a discount is.
That part of company profits after tax paid to shareholders in proportion to their shareholding.
Dividend Reinvestment Plan (DRP)
Under these plans, shareholders can choose to use their Dividend to acquire additional shares in the company instead of receiving a cash payment. These shares are usually issued at a discount on the current market price of the shares in the company.For Capital Gains Tax (CGT) purposes, if you participate in a Dividend Reinvestment Plan you are treated as if you had received a cash dividend and then used the cash to buy additional shares. Each Share (or parcel of shares) acquired in this way – on or after 20 September 1985 – is subject to CGT. The cost base of the new shares includes the price you paid to acquire them – that is, the amount of the dividend.
Division 13A (ITAA) (tax concessional treatment of shares – superseded)
A division of the Income Tax Assessment Act 1936 which provided tax concessional treatment of shares and Rights acquired under Employee Share Schemes meeting certain specified conditions up until June, 2009. It was replaced by new legislation – Division 83A of the ITAA – from 1st July, 2009.
Division 83A (ITAA)
(tax concessional treatment of shares)
A division of the Income Tax Assessment Act 1972 which provides tax concessional treatment of shares and Rights acquired under Employee Share Schemes meeting certain specified conditions from 1st July, 2009.
The extent to which a shareholder is protected from losing money if the value of his/her shares fall. Please note that hedging facilities of this kind are now prohibited for key management personnel under s206J of the Corporations Act 2001.
An employee who is eligible to participate in an Employee Share Ownershi Plan.
– Section 139E of Corporations Act
A written Election that was to be made by participants receiving qualifying Shares or Rights under an ESOP. This Election had to be made (in addition to other conditions being satisfied) to obtain the Exempt Share Benefit under the old Division 13A (ITAA). The Election had to be made before the time the participant submitted his or her tax return for the year that the qualifying Shares or Rights are received (although in certain limited circumstances the Commissioner of Taxation may grant an extension of time to make the Election). This Election is no longer required under Division 83A of the ITAA, which applies from 1st July, 2009. This is still relevant for grants made prior to 1 July 2009 where an employee is proving that they elected to pay tax upfront and therefore do not have a Deferred Taxing Point that needs to be reported under the new reporting regime. This section will not apply after 2019.
Employee / Employees
Employees can include current, past or prospective Employees and their Associates. For the purposes of the ESS rules, directors and independent contractors are also treated as employees.
Ownership of a business by the people who work in it; this can be part or full ownership.
An Employee Buyout is the full or partial acquisition of an organisation by the employees of that organisation.
This term, also called worker engagement, is a business management concept. An “engaged employee” is one who is fully involved in, and enthusiastic about his or her work, and thus will act in a way that furthers their organisation‘s interests. According to Scarlett Surveys, “Employee Engagement is a measurable degree of an employee’s positive or negative emotional attachment to their job, colleagues and organisation which profoundly influences their willingness to learn and perform at work”. Thus engagement is distinctively different from employee satisfaction, motivation and organisational culture. Engagement can be seen as a heightened level of ownership where each employee wants to do whatever they can for the benefit of their internal and external customers, and for the success of the organisation as a whole.
Employee Involvement is creating an environment in which people have an impact on decisions and actions that affect their jobs.
Employee Share Scheme (ESS)
An arrangement or plan structure under which employees can obtain shares in the company for which they work. This is usually initiated by the company. (Also called ESOPs or Employee Share Plan).
ESS Annual Report
The report that an employer provides to the ATO with information on discounts that Employees or their Associates have received on ESS interests either directly or through an employee share trust.
The statement that an employer gives an Employee with information about any discounts the Employee or their Associates have received on ESS interests. It contains information needed to complete the employee’s tax return.
Equity is a generic term that is used to cover all Security types, i.e. shares, Rights or Options. If you have “Equity” it usually means ownership in an organisation, usually in the form of shares.
Employee Share Options Plan
Employee Share Options Plan in the US. In Australia it can also mean and all employee plans, also known as an Employee Equity Plan, an Employee Share Scheme or an Employee Share Plan.
– Employee Share Scheme
Employee Share Scheme – another name for an ESOP or employee share plan which is used in Division 83A of the Income Tax Assessment Act 1997.
An ESS Entity; has an aggregated turnover less than $50M; is not listed on the stock exchange; is incorporated for less than 10 years; and is an Australian resident taxpayer.
An ESS Employee ESS Employee must have a minimum holding period of 3 years.
An ESS (Employee Share Scheme) interest, in a company, is defined in section 83A-10(1) as a Beneficial Interest in a share in a company or a right to acquire a Beneficial Interest in a share in the company. It thus includes both employee shares, Rights and Options.
An ESS Offer must be for ordinary shares with not more than 10% ownership (for options – the exercise price must not be less than the minimum value of the shares) (for Shares – the shares must not be offered for more than a 15% discount).
Exempt Share Plan
and Exempt Share Benefit
As provided for under Division 83A (ITAA), a share plan designed to take advantage of the tax exempt share benefit. This plan has certain specific provisions that need to be met for the plan to be considered a tax exempt plan but if those conditions are met it entitles an employee to $1,000 worth of shares, Rights or Options tax free (income and CGT free). The key conditions are: it must be an ESS Interest under the Tax Act definition, the plan must be offered to 75% of all permanent part time and full time employees on the same terms and conditions, it must be restricted for 3 years or until the employee leaves, whichever happens first and an employee must have total taxable income of less than $180,000 per annum.
In relation to an ESOP, to exercise an Option means to take action to make use of your legal rights or privileges to acquire a share in your employer company and usually this requires you to pay the relevant Exercise Price determined when those Options were granted to you.
The amount payable to exercise an Option to acquire a share, effectively to pay for the share.
Financial Assistance (s260 of Corporations Act)
Five per cent or 5% in 3 years limit
This relates to the limit that exists in ASIC Legislative Instrument (Class Order) 03/184. Offers for issue of shares or unexercised Options must not exceed 5% of the issued capital of the company. The calculation includes all offers in the previous 3 year period but excludes offers to overseas employees, offers to senior employees within s708(12) or other offers exempted under s708 to be excluded from this number. If the 5% issued capital limit is exceeded it means that a company cannot rely on the exemption from Prospectus Filing requirements in the ASIC Legislative Instrument (Class Order) 14/1000 (for unlisted companies the cap is 20% see ASIC Legislative Instrument (Class Order) 14/1001).
A term included in ESOPs that will ensure that a share receives the Deferral Concession. A share subject to forfeiture means that it may not vest to (that is, may be forfeited by) a participant in certain circumstances, e.g. for example if an employee leaves the company within 3 years of the share being granted.
Tax paid by a company on profits distributed as Dividends. The recipients of the Dividend can deduct the Franking CFredit from the tax payable on the Dividend to reduce their personal income received from any source.
FBT or Fringe Benefit and Fringe Benefits Tax
A benefit provided to an employee or an employee’s Associate by the employer, by an Associate of the employer, or by another person under an arrangement with the employer, in respect of the employment of the employee. A Fringe Benefit is taxed and the payment of FBT is made by the employer. Fringe Benefits exclude such payments as salary and wages, benefits provided under Employee Share Schemes, superannuation, and eligible termination payments, etc.
Fully Paid Plans
Fully paid share plans are where the shares bought, issued or awarded under the plan are fully paid for. The plan can take a number of different types of forms for example, deferred share plans, exempt share plans, Loan Plans, Salary Sacrifice plans, performance shares/Rights or Options are all in this category. New employee share plans are all fully paid plans.
Genuine Disposal Restriction
For a restriction to be a Genuine Disposal Restriction it must be in the conditions of the Plan and apply from the date that the employee acquires the shares/Rights or Options. It can be either imposed by the company under the Plan Rules or agreed to by the employee at the time of the offer. It can apply on shares (that result from an Option/Right exercise) or on the Right/Option. It allows tax deferral beyond the vesting point.
If a Salary Sacrifice plan does not have a Genuine Disposal Restriction then there will be no tax deferral.
A Genuine Disposal Restriction can be:
- a condition of the scheme that prohibits the employee from disposing of a share for a fixed period of time, where the disposal restriction is enforced by a holding lock or by the shares being held in a Trust
- a condition of the scheme (including documented company policy) that prohibits disposal of the shares or Rights or the exercise of the rights, where that disposal would be in breach of the insider trading prohibitions in the Corporations Law 2001
- a contractual condition of the scheme that prohibits the employee from disposing of the ESS Interests, provided that there are serious and enforced consequences for breaching the condition.
- A company may have an internal share trading policy prohibiting disposal of ESS Interests. This will only be a Genuine Disposal Restriction if there are serious and enforced consequences for breaching the policy.
A disposal restriction can only be lifted in special circumstances or in cases of financial hardship.
Hawking and Anti-Hawking prohibitions
The hawking prohibitions, set out in sections 736, 992A and 992AA of the Corporations Act 2001, in general terms provide that a person must not offer financial products for issue or sale in the course of, or because of, an unsolicited meeting or telephone call with a retail client (which is given an extended meaning in section 761G of the Act).
Income Tax Assessment Act 1936, as amended, or the Income Tax Assessment Act 1997.
A right to acquire at a future time either:
- Shares or cash (at the discretion of the employer)
- a number of Shares, where that number cannot be determined at the time of acquisition of the right but will be determined at a later time.
Insider Trading (s1002 onwards of Corporations Act)
Insider Trading means misuse of ‘inside information’ i.e. information not generally available that has a material effect the price or value of particular financial products that are able to traded.
Legislative Instruments (Class Orders)
Before 2015 Legislative Instruments were referred to as Legislative Instrument (Class Order)s. Legislative Instruments usually apply to a class of persons who carry out a particular activity in certain circumstances, e.g. timeshare scheme operators, corporations conducting market research, operators of managed investment schemes based on syndicate arrangements.
Refers to the ready ability to buy and sell shares on a market. In employee owned firsm, this term is generally where shares are used and normal shareholders are affected by the increase in share capital. If shares are illiquid it is hard to find a buyer for the shares or to find someone willing to sell their shares. Illiquid shares are common in companies that were owned by a founder(s) and then listed on a stock exchange, with the founder(s) still holding a large amount of the shares.
Listed public companies
A company listed on a recognised stock exchange.
Admission of a company to the official List of a recognised stock exchange so that trading in the shares may occur in the market operated by that stock exchange.
The Listing Rules of the recognised stock exchange, as amended from time to time. For instance the ASX Listing Rules.
Loan Plans allow Fully Paid shares to be provided to employees and the shares are paid for by the use of a loan usually funded by the company, the loan is often interest free and limited recourse (i.e. the only Security for the loan is the shares, so if the share price falls the only thing that the employee will forfeit or lose is the shares if they leave). The loan is usually repaid through after tax Dividends. Restrictions are often placed on the shares while loans are being repaid, i.e. the shares can not be sold unless the loan amount can be repaid. Loan Plans are most prevalent in unlisted companies.
The price agreed to in transferring ownership of a share between a buyer and a seller. If the share is listed this is the price that a buyer is willing to pay.
Market Value has a specific meaning for tax purposes, please see the link to the ATO page that sets this out in detail for listed Securities, and unlisted Rights/Options an employee is also able to come to a different opinion of what the Market Price is provided it can be justified. The ATO also has a calculator for working out the income tax value of the Options/Rights at the taxation point.
Minimum holding period (Exempt Plans)
Section 83A-45(5) defines the required minimum holding period for shares or rights benefiting from the $1,000 exemption as being the earlier of the date of ceasing employment or 3 years from date of acquisition of the shares or Rights.
An offer contained in the ESOP offer documents to participate in the plan.
this is usually the document that is provided to the employees at the time of the offer and it can also be a short form Prospectus . For the purpose of ASIC Legislative Instrument (Class Order) 14/1000 and 14/10011 it has a specific meaning and requires that the document (communication materials) provided to employees must comply with the requirements set out in the Class Order.
Options and Option Plans
An Option is a contractual right but not an obligation to acquire a share in the future at a set cost. Fully Paid shares are issued or transferred when the Option is ‘exercised’, this is the fulfillment of any specified conditions and includes the payment of any set Exercise Price. ESOP plans which provide Options to employees are called Option plans.
Partly paid share plans
Participants in partly paid plans are issued shares at a market or predetermined price (eg: $2) but are only required to pay up a small portion of their value (usually 1 cent). The participants remain liable for any unpaid amount (i.e. $1.99) on the shares, even if the Market Price of the shares falls below the value at the date of issue. Partly paid plans are no longer commonly used in Australia.
Payroll tax is a tax imposed by state governments on employers. The tax levied is based on a percentage of the total of salaries and other benefits paid to or for employees. ESOP benefits provided to employees are generally subject to payroll tax.
A condition which must be met before a participant becomes entitled to a share/Right or Option which is imposed by a company at the time that the Securities are offered. See also Vesting condition.
Plan Rules or Rules
The formal document under which the Plan operates. These rules are specific to each plan.
Previous Law (Division 13A of Part III of the Income Tax Assessment Act 1936)
Division 13A of Part III of the Income Tax Assessment Act 1936, which provided for the taxation treatment of Shares or Rights acquired under Employee Share Schemes before 1 July 2009.
The amount of output that is produced per unit of input; usually expressed in terms of output per unit of time and usually measured either by labour productivity or by total factor productivity. Commonly ESOPs are considered to increase a company’s productivity levels/employee engagement. There is a wealth of research on this topic, see our publications section for more information on this.
Profit sharing entitlements are calculated based on a percentage of profits achieved by the company above a set level. These entitlements are placed in a pool which is then divided up and distributed to employees. In relation to an ESOP, the pool is used to fund the acquisition of shares in the employer company for the participating employees.
A proprietary company is a company with less than fifty non-employee shareholders. Its ability to offer shares is limited. The transfer of ownership of shares is often restricted. Many small to medium sized enterprises are owned by proprietary company structures. Proprietary companies are often referred to as private companies (and are always unlisted). Proprietary companies have limited reporting and audit requirements to fulfil. Proprietary companies must change their registration status if they wish to have more than 50 non-employee shareholders.
Prospectus and Prospectus Filing
When a company wants to offer shares to the public, they may offer securities such as Shares, debentures (see https://www.moneysmart.gov.au/glossary/d/debenture) and Options to the public; to meet their legal disclosure requirements and inform potential investors how their money will be used, the company will issue a Prospectus. Professional advisers are involved with the preparation of the prospectus (offer document), and the formal listing application is lodged with ASX within seven days of lodgement of the prospectus with ASIC.
A public company is permitted to have more than 50 non-employee shareholders. Its ability to offer shares is less limited than a proprietary company. Public companies may also apply for listing on a recognised stock exchange where they meet certain criteria. Shares can usually be transferred to different or new owners more easily. Most medium to large businesses are owned by public companies. Public companies have significantly greater reporting requirements to fulfill.
Real Risk of Forfeiture
For an employee discount on a share or Right to enjoy tax deferral under Division 83A, the employee must be at some risk of never receiving the share or exercising the right. ATO ID 2010/61 explains the test and what is accepted as a real risk of forfeiture, for example a plan that has a relative TSR measure would be considered a plan that has a real risk of forfeiture, as would a plan that has a Tenure Vesting condition.
A generic term to describe any payment or benefit received in respect of employment, including salary, benefits, short-term incentives, bonuses and long term incentives, including shares, Rights and Options.
Reportable Fringe Benefits
Benefits an employer gives their Employee because of their employment (other than salary and wages) are included as Fringe Benefits, even if the employer actually provides them to an associate of the employee. The grossed-up taxable value of those benefits that the employer records on their employee’s payment summary for the income year that corresponds to the employer’s FBT year is their reportable Fringe Benefits amount.
The reportable Fringe Benefits total is the sum of the reportable Fringe Benefits amounts from different employers.
Reportable Superannuation Contributions
Your reportable superannuation contributions are the sum of the following:
- any personal deductible contributions you may have made
- any reportable employer super contributions your employer may make for you.
Replicator plan (Phantom Plan)
A replicator plan gets its name because the plan tries to ‘replicate’ a real employee share plan, but does so without issuing real shares or Options. A replicator plan usually offers participants, for no or nominal cost, an entitlement to receive a cash payment in the future subject to satisfying predetermined performance and/or vesting conditions. A replicator plan may be supported by a set of plan rules, an offer letter, a plan booklet and even a ‘Certificate of Entitlement’. Replicator plans are often used where the company does not want to use “real” shares, for reasons including control, minority interest problems or lack of a market. Replicator plans are also known as “phantom” plans, ‘synthetic’ plans or ‘shadow’ plans.
Rights and Rights Plan
A plan conferring on the participant a right to acquire a share (or other Security) in the future on pre-determined conditions at no or nominal cost, these are sometimes called zero priced options.
A term used to describe an Election made by an employee to forego salary in exchange for another benefit. Salary Sacrifice must be made in advance of an employee being entitled to the salary or bonus.
Salary sacrifice (tax-deferred scheme)
Employees who have acquired ESS interests under salary-sacrifice arrangements are taxed in the income year the deferred taxing point occurs.
In addition to the general conditions the ESS and employee must meet, the following specific conditions must also be met:
For the tax to be deferred, the employee must not receive more than $5,000 worth of shares (or stapled securities) during the year under salary-sacrifice arrangements from the employer.
Security / Securities
Securities are Shares, debentures, stocks or bonds; or interests in a managed investment scheme, or units of such shares.
Self Acquisition (provisions in s259 of Corporations Act)
Self Acquisition is when a company acquires or increases its control of an entity that holds shares, or units of shares in the company, or the company issues shares to an entity it controls, or shares in a company are transferred to an entity it controls.
A fully paid share in a company usually entitles the holders to attend and vote at shareholders meetings, participate in the distribution of the company’s profits and, when the company is wound up, participate in its surplus assets, if any. A shareholder may only participate in accordance with the rights specifically laid out in the company’s constitution. For instance a holder of ‘ordinary shares’ may have different rights to the holders of special ‘class’ of shares or of ‘preference’ shares.
A shareholder is a person or organisation that owns shares in a company and whose name appears in the register of members as being the owner of the shares. Depending on what type of shares they own, the owner may have certain rights in the company, for example, they may have voting rights when the company makes important decisions.
Share market or stock market or stock exchange
Shares in listed public companies are quoted and traded on a recognised stock exchange. There are a number of stock exchanges throughout the world and in Australia there is the ASX or the Chi-X. In relation to an ESOP, ASIC recognises certain stock exchanges and these are listed in the ASIC Legislative Instrument (Class Order) 14/1000.
Share Plan or Plans
A collective term referring to an Employee Share Plan.
A tax imposed by Australian states on, amongst other things, documents or transactions including those that affect or record the transfer of the ownership of assets or the creation of rights in respect of assets (NB: listed shares are not subject to Stamp Duty).
For ESS purposes, a company is a start-up for an income year if, at the end of its most recent income year before the ESS interest was acquired in it:
- the company and any subsidiaries or its holding company and any subsidiaries
- were not listed on a stock exchange
- had been incorporated for less than 10 years
- the company’s aggregated turnover did not exceed $50 million.
A concession available to an employee with ESS interests in a start-up company provided that the scheme meets certain conditions
- the employer (which may or may not be the company issuing the ESS interest) is an Australian resident company
- the employee meets the 10% ownership and voting rights test
- the discount on an ESS interest that is a share is no more than 15% of its market value at the time it is acquired
- the amount payable to exercise an ESS interest that is a right is greater than or equal to the market value of an ordinary share in the company when the right is acquired.
Any event which requires income to be recognised or a benefit to be valued and recognised in a person’s tax return thus giving rise to taxation.
[Refer to ESS Deferred Taxing Point definition]
Assessable income less allowable deductions.
Taxable Income After Adjustments
An employee’s taxable income after adjustments for the year is the sum of their:
- taxable income (including the total amount of all ESS discounts)
- reportable Fringe Benefits total (if any)
- reportable superannuation contributions (if any), and
- total net investment loss.
This is a vesting condition where an employee has to remain with the company for a certain period of time otherwise they lose or forfeit the shares. It is related to their employment or tenure with the company.
Termination Payments (including for managerial and executive officers).
Payments by an employer on termination of employment. Termination is when an employee’s contract of employment with an employer ends. This sometimes happens because of redundancy, resignation or dismissal.
Ten per cent or 10% limit
Section 83A-45 limits the tax concessions in that section to Employee Share Schemes to situations where an employee will not have a Beneficial Interest in more than 10% of the shares in the company and will not be able to cast, or to control the casting of, more than 10% of the maximum number of votes that might be cast at a general meeting of the company. If an employee holds more than 10% of the company they will not be able to rely upon the tax exemption or Tax Deferral provisions in Division 83A.
Total Net Investment Loss
An employee’s total net investment loss is the sum of:
- the amount that the employee’s deductions from financial investments are greater than their income from those investments for the income year, and
- the amount that the employee’s rental property deductions are greater than their rental property income, for the income year.
Means a Trust established under a deed. A Trust is often used to hold shares on behalf of employee participants in an ESOP. Trusts are used for a variety of reasons:
- to hold shares prior to allocation;
- to hold shares after forfeiture and prior to reallocation, i.e. to recycle shares;
- to avoid self acquisition by the company;
- to reduce insider trading concerns;
- to help unlisted companies to avoid minority shareholders or reduce the number of shareholders on the register;
- for independence reasons to hold the shares of the employee separate from the company.
Means the designated Trustee under the Trust. The Trustee’s role may include managing the beneficiaries’ (i.e. employee ESOP participants) interests in the Trust (eg. shares) in accordance with the rules of the plan (Trust deed).
The party whose job it is to manage a Trust. A Trustee may also be the Trust Manager.
Unlisted Public Companies
A Public Company that is not listed on a recognised stock exchange.
Upfront Tax Concession
(commonly ‘the $1000 exemption’)
The tax concession in Subdivision 83A-35 which exempts up to $1,000 of discounts on ordinary shares acquired by an employee from income tax. Also see ‘Exempt Share Plan ’ definition.
Vest or Vesting
Vest means to become available. In relation to an ESOP, shares or Options which vest or have vested (and are not subject to any Performance Conditions) may be dealt with, sold or otherwise disposed of by the employee participant. The shares or Options may also continue to be held within the ESOP. Where a vesting condition has not yet been satisfied then such shares or Options are referred to as ‘unvested shares/Options’.
A time based service condition or other condition imposed on employee participants by a company when offering shares or Options under its ESOP. The vesting condition must be satisfied before a participant becomes entitled to deal with the share or Option. See also Performance Condition.