Advantages
- No tax to be paid on equity benefit.
- Safe-harbour valuation of equity is easy and usually heavily discounted.
- Allows for service and performance tests.
- Likely the most attractive equity plan that is available for both employers and employees in qualifying entities.
Disadvantages
- Only applies to unlisted companies that are <10 yrs. old, and have <50m turnover.
- Often no prospect of being able to sell shares – where is the benefit?
- Options are cumbersome, and SARs are not allowed.
- Options are considered “contribution plans” subject to disclosure requirements and contribution limits unless limited to “senior managers” (or similar).
About Start-up Concession Plans
In FY16 the Government introduced taxation concessions for ESOPs operated by start-up companies. However, the definition of start-up is narrow and excludes all companies listed on a stock exchange. Nevertheless, if a company qualifies as being a start-up these concessions should be considered, as the tax treatment is favourable, and the plan offers the flexibility of attaching vesting conditions (to options) if so desired.
