How to manage employees' equity in Australia

Granting equity to employees is a crucial investment in the future of any competitive business. Doing so fosters a sense of ownership, motivation, and loyalty among employees since they have a personal stake.

The key to offering non-cash compensation is to be transparent about how it works and create a space for the team to understand the details. In Australia, offering and managing employee equity plans can get complex with local and regional regulations set by the Australian Parliament and the Australian Securities & Investments Commission.

We'll break down the essentials below on managing employee equity in Australia and staying compliant in the regulatory landscape. 

Equity 101: Stock options, RSUs, and ESPP

Let's start by defining the three most common types of equity compensation before diving more into Australia: stock options, RSUs, and ESPP.

• Stock options give employees the ability to purchase company shares at a set price within a specific timeframe. Compensation packages often include stock options to incentivize employees and align their interests with the company's. This option allows employees to profit if the company's stock price rises above the set price; they can buy shares at a discount and sell them at a higher market value later.

• Restricted Stock Units (RSUs) are employee compensation types granting the right to receive company shares after fulfilling certain conditions, typically related to time (vesting) or performance. Unlike stock options, RSUs are valuable from the beginning, even if the company's stock price decreases, providing a guaranteed level of compensation. However, until the RSUs vest, the employee doesn't own the shares and, therefore, has no shareholder rights, such as voting. After vesting, the RSUs are converted into company shares that the employee owns.

• An Employee Stock Purchase Plan (ESPP) is a stock program companies offer employees as part of their payroll. Employees can contribute part of their salary over a set period through automated payroll deductions. At the end of that period, the collected contributions are used to buy company stock at a discounted price (generally below the market value).

What are the rules for foreign companies granting equity awards to employees of their Australian entities?

In Australia, Employee Share Schemes (ESS) offer employee equity through stock options, restricted stock, RSUs, or stock purchase plans. It's important to comply with local laws and regulations, especially when disclosure requirements are needed.

The regulations differ for unlisted companies and those listed on an Australian Securities Exchange or an eligible foreign financial market under the Corporations Act. 

Due to tax and securities laws, unlisted Australian companies have historically faced challenges in offering employee share schemes. However, recent reforms have made offering these plans easier for private companies.

A new Australian securities law took effect on October 1, 2022, offering significant improvements, especially for private companies. For example, private companies no longer need to wait three months after an IPO to offer awards in Australia. The new law also includes the following:

• ESS offers that do and do not require monetary payment. Companies can offer non-monetary compensation, such as RSUs, without a specific form of disclosure as long as they state that the offers are made under the new rules, regardless of whether they are public or private.

In contrast, an ESS offer that requires monetary payment at grant or issuance of shares (such as stock options or shares under a share purchase plan) must be accompanied by an "ESS offer document" and comply with an issue cap (generally 5% for a listed company and 20% for an unlisted company).

• Higher monetary cap for ESS offers made by unlisted companies. Private companies offering ESS with monetary payment must comply with a monetary cap of AUD 30,000 per employee in 12 months. The cap refers to the amount of money payable by a participant for shares.

New Australian tax rules, effective July 1, 2022, eliminate the termination of employment as a point at which ESS awards are subject to taxation. This reduces the risk of employees owing taxes on equity awards before receiving any economic benefit. Employees can defer tax on awards from ESS, such as stock options, restricted stock, restricted stock units (RSUs), or employee stock purchase plans. 

How do I assign equity to employees?

An Employee Share Scheme can help attract and retain talent, create ownership within the team, and reward employees for their hard work—all vital benefits to your company. 

Here’s a brief overview of how to assign equity to employees:

• Create an allocation strategy. You can distribute employee equity based on seniority, role, performance, or equally across the team. Keep in mind that equity is a limited resource, so balance generous grants with preserving equity for future hiring and fundraising needs.
• Choose the equity offerings. Consult with a financial or legal expert to grasp the tax, dilution, and administration implications of receiving stock options, RSUs, or participating in an ESPP as a public or private company.
• Designate a vesting schedule. Equity awards typically vest over time to incentivize employee retention. A typical schedule is four years with a one-year "cliff" (no equity until the one-year mark) before equity is granted.
• Set a fair market exercise price. If your company offers stock options, it's crucial to set the exercise price at the fair market value of the stock at the time the options are granted. Otherwise, setting it too low could result in tax implications.
• Document the ESS plan. Make sure to document all equity awards in a clear equity incentive plan and provide each employee with a grant agreement outlining their award specifics and providing personalized training when

What information do I need to report to the ASIC? 

If your company issues shares, it must record them in the ASIC register. The register must contain the following information about each member and their shares:

• Their name and address
• The date added to the register
• The shares held by each member
• The date of every issue of shares
• The number of shares in each allotment
• The class of shares
• The share numbers or share certificate numbers (if any)
• Indicate whether the shares are fully paid, including any unpaid amounts on the shares

Companies that provide shares, rights and options to their employees under an employee share scheme must submit an annual ESS report to the Australian Taxation Office (ATO) and an ESS statement to employees. Employees must receive ESS statements by July 14, and the ATO should get the ESS annual report by August 14, following the tax year's end.

For Australian-listed companies, your share plan administrator can assist with ESS reporting. If you are a foreign and private companies without an Australian administrator, you may use the ATO Business Portal's ESS online form to lodge the annual report. Penalties may be applied if you file late, or if you fail to file. 

Best practices for employee equity in Australia

When communicating equity plans, you want to take the time to explain all the details and be transparent, which is crucial when new laws—like the securities law for employee share plans—come into effect. 

Employees can better understand their equity packages through workshops, informational sessions, or one-on-one consultations. During these training sessions, specify the equity type, vesting schedules, and exercise prices. Additionally, you should explain the risks and advantages of equity ownership and tax implications.

The ultimate goal is for employees to confidently participate in the company's growth journey and feel valued in the process.

Rippling and its affiliates do not provide tax, accounting, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any related activities or transactions.