Adams Employee Share Ownership Plan
An employee share ownership plan (ESOP) is often the best way to offer shares in a Company to key employees.
Most of the tax legislation (Division 83A) in relation to these types of plans are targeted towards public companies but they must offer shares to at least 75% of their employees.
In addition, their employees with salaries over $180K are excluded from the paltry tax benefits that are available under Division 83A. Of course, high salaried employees are usually the very people whom business owners are usually interested in targeting to be part of an ESOP.
The shortcomings of the types of ESOPs contemplated under our tax law, has caused us to think of a better set-up, particularly where an SME is involved.
Our private company employee share ownership plan is a mechanism by which shares (and options) in trading companies can be offered to employees (at market value) in a way that is a win/win for the employer and the employee. The business owners can pass ownership seamlessly and the employee is getting a cut of the action on beneficial terms.
The trust is set up with a nominal settled sum- say $100- paid by the employer. It hasemployer units and employee units. There is also an employment agreement with each relevant employee.
Once the employee reaches his/her KPIs, the employer buys an employer unit for $1.00. This entitles the employee to apply for employee units. One employee unit costs the same as one share. The price is paid by the employee from his/her after tax bonus to avoid the application of Sent v FCT  FCA 382 and if more money is required, it is obtained from the employer by way of loan on friendly terms. Division 7A should not be a problem on the first purchase. Sections 18 and 19 of the FBT legislation should also not be a problem because of the otherwise deductible rule. The employee then uses the dividends from the units to pay back the loan.
There are buy-back provisions which apply when a triggering event occurs – say for example, where the employee leaves or fails to perform. They can be in the employment agreement but are often better in the trust.
The second purchase (if any, down the track) also should not be a Division 7A problem as the purchase is being made because the employee met the KPIs not because the employee is a shareholder. However, in marginal situations, it may be better to just have the loan Division 7A compliant.
Where there are less than about 4-6 or so employees, then it can be better to simply use stand alone employment agreements, using similar mechanisms to those described above for ease of administration, rather than embarking on a significant structural change and adopting a fully fledged ESOP.