The Australian federal government made two announcements in late October that go a little bit further in making it easier for start-up companies to use employee share schemes (ESS):

• an amendment to the Corporations Act to ensure ESS disclosure documents do not need to be made publicly available; and

• a consultation paper on potential changes to the disclosure requirements in the Corporations Act for start-ups.

These are discussed below but it is worth a minute to put Australia’s ESS rules into context.

It is pleasing that the government has got around to doing a number of things about the ESS rules, mainly for start-ups and bringing the taxing point for everyone to the time of exercise.

Australia is behind the pace with its concessions for start-ups. Most OECD countries recognized years ago that technology was changing the world and they needed concessions to keep their technologically-creative talent at home.

In April 2012 (!) we wrote about the US making legislative changes to reduce reporting requirements for smaller companies (see HERE). We titled that article “The US eases remuneration and other disclosure requirements for start-up companies – a path for Australia?”

The US was probably the first country to recognize the benefits of providing various taxation, disclosure and reporting concessions for innovative technology companies. However, in recent years other countries like the UK, Ireland, Singapore and Canada have quickly caught up.

Notwithstanding significant lobbying of both sides of government by Guerdon Associates and other professional firms over the past decade, Australia is only just beginning to implement some changes.

The recent tax changes for start-ups are a welcome initiative –but, there are many listed public companies that could and should benefit by those changes but are excluded.

Treasury’s concern about extending the tax concessions is misplaced because it believes there will be a loss of revenue. Fostering fast growing start-ups in Australia is one way of getting more tax revenue.

But, let’s have a look at these recent developments.

Publicly available disclosure documents

The Treasury Laws Amendment (Enterprise Incentives) Bill 2016:improving employee share schemes was released on 26 October as an Exposure Draft and for consultation up to 2 November. Given the nature of the Bill and the limited consultation period, you can expect that it will be introduced into Parliament with few changes.

The income tax and CGT concessions for employees of start-ups took effect from 1 July 2015. Eligible start-up companies are private companies that have been in existence for less than 10 years and have aggregate turnover less than $50m. Our earlier articles provide more detail (see HERE and HERE).

At present, the Corporations Act requires the offer document and other related material like financial statements to be lodged with ASIC. Any such documents lodged with ASIC are available for inspection by the public under existing section 1274 of the Corporations Act. This lack of confidentiality has concerned many entrepreneurial start-up founders. The last thing they want is their financial statements and other information as required by section 715 of the Corporations Act to be available for the scrutiny of the public.

Many would agree that these are legitimate concerns of the founders of private companies.

Fortunately, the government has also reached that view. The proposed legislation will provide an exemption so that ESS disclosure documents will not be publicly available.

The exemption from public inspection will be available if:

• it is an offer of ESS interests as defined for income tax purposes;

• the disclosure document specifically states the ESS interests are only available to employees of the group and are only over ordinary shares;

• the company or others in the group are not listed at the end of the most recent financial year before the lodgement time;

• all of the companies in the group have been incorporated for less than 10 years; and
• the issuing company’s aggregated turnover for the pre-lodgement year did not exceed $50m.

The disclosure documents will still need to be provided – subject to the following discussion – but will not be available for public inspection.

Making ESS more user friendly: Consultation Paper

The second announcement was the release of a consultation paper on further measures that the government could take to make ESS in general more user friendly.

Treasury is seeking feedback on potential changes that could be made to the disclosure requirements for all companies that would make ESS easier to adopt and implement. Even large fully resourced companies acknowledge that the disclosure requirements for ESS are onerous and not necessarily helpful.

Equity arrangements for employees are, in most cases, an offer of securities for the purposes of the Corporations Act and require the employer to issue a disclosure document like a prospectus or Offer Information Statement (OIS), unless an exception applies.

The Government is seeking the public’s views on the following matters raised in the consultation paper:

• Should the OIS requirement for an audited financial report within 6 months of the offer be amended so that companies do not have to do a mid-year audit?

• What alternative disclosure would be appropriate to ensure employees are provided with adequate information?

• Should the requirement for audited accounts with an OIS be removed for ESS offerings?

• Should the OIS rules be extended to include non-salaried directors, contractors and consultants for the purpose of the $10m threshold?

• What other changes to the OIS regime could be made to make it more user friendly companies wanting to use an ESS?

• Should employees not be counted as investors for purposes of the 20/12 rule that enables small scale offerings of no more than $2m in any 12 month period?

• Should the 20 investor and $2m caps be raised for small scale offerings?

• Should the ‘senior manager’ exemption (that allows offerings without disclosure) be extended?

• What other disclosure exceptions could be made to facilitate ESS offerings?

• What changes could be made to the advertising, hawking, financial product and managed investment scheme rules could be made that would facilitate ESS offerings?

• Should the Corporations Act be amended to make it simpler for employers to offer options and rights to their employees under ESS? and, probably the most important question,

• What other changes to the Corporations Act should the Government consider to make ESS more user-friendly?

As noted above, Guerdon Associates and others have been pursuing changes to the Corporations Act for many years. So, it is pleasing to see the nature of these questions indicating an open approach to change.

Treasury’s perspective on the disclosure requirements is premised on investor protection and has sought to ensure ESS offerings are largely treated in the same way as other offerings of securities albeit that in most cases employees do not generally make cash investments.

The most significant change that should be sought would be to remove employee share scheme arrangements from the broader requirements of the Corporations Act and establish an exclusive set of rules for ESS.

Guerdon Associates will be making a submission on the consultation paper and will publish it on our website. Submissions are due by 7 December.

See the government’s discussion paper for submissions HERE,

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