Assessing Federal Legislative Changes to Employee Share Schemes

This article focuses on recent measures taken at the federal level to renew Australia’s employee share scheme regulation for unlisted companies, in a bid to compete with international markets.


  • In December 2021, following prior consultations in May and August 2021, exposure draft legislation and an explanatory memorandum were released by the Government outlining proposed amendments to the laws regulating the offering of Employee Share Schemes (ESS).
  • The amendments are being implemented as a response to the Government’s current regulatory treatment of ESS, which provides challenges for small-to-medium entities (non-ASX listed companies) seeking to offer ESS.
  • At a high level, the Government’s proposed changes aim to:
    1. simplify the process for companies to offer ESS;
    2. expand access to ESS for employees of unlisted companies;
    3. support job creation and foster business development;
    4. safeguard Australia’s regulatory framework in offering competitive remuneration for employees; and
    5. promote Australia’s sustained post-pandemic economic recovery.

What are the proposed changes?

  • The proposed changes will have a number of practical consequences for various stakeholders, including employees of unlisted companies, employers and members at the director / executive level.

Providing Increased Shareholder Opportunities

  • Pursuant to the recent Federal Budget announcements, the quantum of shares employees can acquire in an unlisted company without further compliance with the Corporations Act’s relevant securities law and AFSL provisions1 will increase from $5,000 to $30,000 per year plus 70% of dividends and cash bonuses.
  • In addition, unexercised options can be accrued over a five-year period up to a cap of $150,000.
  • Further, the proposal includes a removal of the limit ($5,000) on the amount invested by participants in the ESS, in the event the terms would allow the employee to immediately profit from the sale of their purchased interest as a result of a planned sale or listing of the company.
  • This increase is anticipated to mainly relate to acquisitions made by employees through salary sacrifice or loan share arrangements accordingly this should result in employers seeing an increased potential to promote and provide share ownership to staff.
  • From 1 October 2022, provided the relevant company complies with the new ESS legislation the company will receive relief from disclosure under the Corporations Act 2001 (Cth).2

No Tax Trigger for Ceasing Employment

  • The legislation removing the cessation of employment as a deferred taxing point under the ESS rules received Royal Assent on 22 February 2022.3
  • As a result, from 1 July 2022, cessation of employment will no longer be considered a taxing point under the ESS rules for all new and existing ESS interests that have not reached a deferred taxing point before 1 July 2022.
  • The amendments are a welcome change for employees (particularly “good leavers”), who under the previous rules suffered a cash flow burden (i.e., an unfunded tax liability) on the cessation of employment prior to realising any value for those interests.
  • Under the current ESS laws, where a ESS interest is subject to tax on a deferred basis, the taxing point is deferred until the earliest of the following times:
    1. the time when employment or engagement with the company ends;
    2. vesting, exercise (in the case of options) and removal of any sale restrictions; or
    3. fifteen years after the acquisition of the interest.
  • As a result, the employee is currently liable to pay tax on the ESS interest when they do not have access to the shares or cash to fund the tax.
  • Under the new ESS rules (which are effective from 1 July 2022), employees who cease employment on or after 1 July 2022 are able to retain their unvested ESS interests without being subject to tax on their value on termination of employment, alleviating the cash flow burden.
  • These amendments will not only align Australia’s ESS rules more closely with other overseas jurisdictions but will ease the ESS administrative burden for companies and provide more flexibility in terms of how the interests of departing employees are assessed.

Hamilton Locke’s corporate and tax team is highly experienced in advising both private and listed companies in structuring their employee share plans.

If you would like to discuss the contents of this article, please contact James Delesclefs (Partner), Anushka De Alwis (Special Counsel), Hannah Jones (Senior Associate) or Ali Attia (Lawyer).

1Class Order 14/1001

2It is expected that the Class Orders in relation to ESS (14/1000 and 14/1001) will be retired effective 1 October 2022. Accordingly, reliance on Class Orders will not be possible following this date.

3Corporate Collective Investment Vehicle Framework and Other Measures Bill 2022