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Employee Share Ownership Plan Under Attack

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In its simplest form, an employee share ownership plan (ESOP) is a contract between a company and an employee under which the employee gains the right to purchase shares in the company at a fixed price within a given period of time. There are said to be many benefits of a well thought out ESOP. Specifically:

  • ESOP’s can increase a business’ productivity and profitability by improving its employees’ dedication and sense of ownership towards the business
  • ESOP’s can attract the best employees to your business
  • ESOP’s allow employees to directly benefit from their hard work
  • Traditionally there have been significant tax advantages associated with ESOP’s

Budget proposal

The 2009 Federal budget contained a surprise measure which drastically alters the utility of ESOP’s. Effective immediately, employees will be taxed on the value of shares the subject of the ESOP in the year in which the option is granted. That is, it will no longer be possible to defer tax until the year in which the ESOP rights are exercised. The availability of tax-exempt options, under which employees can receive up to $1,000 worth of shares per year tax free, will become income based.

Consultation process

This budget measure has been heavily criticised by various groups and has received significant media attention. Many large companies have responded to the proposal by putting their ESOP’s on hold until the uncertainty surrounding this policy measure is resolved.

The Federal Government has responded by announcing a ‘fast tracked’ consultation process. A policy options paper is expected to be released shortly.

MST will endeavour to keep you updated in relation to the consultation process, and how it may affect your business.

Author: Savvas Apostolou