Advantages

  • If a company has a sound long term business with profitability enabling consistent dividend distributions and wishes to have a stable committed workforce then a SPLP may be a good plan as it can allow employees to acquire Shares at today’s price and pay off their loans over several years with dividends received as shareholders.
  • The most attractive feature of the SPLP is that participants will enjoy CGT treatment from day one (providing a 50% tax concession if the Shares are held for more than 1 year).
  • Provides highly leveraged reward in high-growth scenarios (but SARs are superior on a same-cost-to-company basis).
  • Often viewed as requiring participants to put “skin in the game”, increasing motivation, but this is artificial because loans are generally non-recourse (repayments limited to the value of the Shares acquired under the plan).

Disadvantages

  • Unlike any other ESOPs, no tax deduction is available in respect of the benefit provided to participants, making it at least 40% more expensive (more of the share price is growing).
  • FBT generally applies to the loan unless the company is dividend paying (“otherwise deductible” rule) or the loan is offered on commercial terms.
  • High risk of producing no value.
  • Participants become shareholders immediately, before “earning” the interest.
  • Having a share purchase loan may impact an employee’s ability to borrow for other purposes such as purchasing a house or  motor vehicle.
  • Private companies can only offer an SPLP to participants who are not shareholders, which effectively means it can only be offered once per participant and can never be offered again while the employee holds Shares (“one-shot-plan”). This makes it unsustainable as an ongoing equity plan.

About SPLPs

These plans were one of the more commonly used forms of ESOP prior to the introduction of accounting standard AASB2 which deals with share-based payments. They are still found in use by a small number of companies mainly in relation to senior executives. Such use seems to have been driven by the “CGT myth” (see Decision Guide LINK).