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Australia Employee Share Schemes Tax Guide

Australian employee share scheme (ESS) taxation. The guide covers: the ESS taxation — upfront taxation — the 'ESS' is the 'arrangement' under which the 'employees' receive the 'shares' or the 'options' in the 'employer company' (or the 'associated company') at the 'discount' (the 'ESS discount'); the 'ESS discount' is included in the 'employee's assessable income' in the 'income year' in which the 'shares' or the 'options' are 'acquired' (the 'upfront taxation' under the 'Division 83A of the ITAA 1997'); the 'ESS discount' is the 'market value' of the 'shares' or the 'options' at the 'acquisition time' minus the 'amount paid' by the 'employee'; the ESS deferred taxation — the 'deferred taxation' applies to the 'ESS interests' that meet the 'deferred tax conditions' — the 'ESS interests' that are the 'shares' in the 'unlisted company' (the 'non-quoted shares' or the 'unlisted company shares') or the 'options' that have the 'real risk of forfeiture'; the 'deferred tax' defers the 'inclusion' of the 'ESS discount' in the 'assessable income' until the 'deferred tax point' (the 'earliest of': (a) the 'cessation of the real risk of forfeiture', (b) the 'sale of the ESS interests', (c) the 'cessation of the employment', (d) the '15-year limit from the acquisition date'); the ESS tax exemption for the start-ups ($1,000 exemption) — the 'eligible start-up companies' can provide the 'ESS interests' to the 'employees' with the 'tax concession' — the 'first $1,000 of the ESS discount' is 'exempt from the tax' (the 'ESS start-up concession' under the 'Section 83A-33 of the ITAA 1997'); the 'eligible start-up' is the 'company' that meets the 'start-up conditions' — the 'incorporation' within the last 10 years, the 'aggregate turnover' below $50 million, the 'unlisted company' (the 'shares' are NOT listed on the 'ASX' or the 'approved stock exchange'), and the 'Australian resident' company; the 'ESS interests' must be held by the 'employee' for at least 3 years (the 'minimum holding period'); the CGT treatment of the ESS shares — the 'ESS shares' that are subject to the 'upfront taxation' have the 'cost base' equal to the 'market value' at the 'acquisition' (the 'amount included in the assessable income' plus the 'amount paid'); the 'ESS shares' that are subject to the 'deferred taxation' have the 'cost base' equal to the 'market value' at the 'deferred tax point' (the 'amount included in the assessable income' under the 'deferred taxation'); the 'CGT discount' (the '50% CGT discount') may apply to the 'ESS shares' held for at least 12 months from the 'acquisition' (or from the 'deferred tax point').

ESS Taxation — Upfront vs Deferred

  • Upfront taxation: The 'ESS discount' is included in the 'assessable income' in the 'year of acquisition'. The 'discount' is the 'market value' at the 'acquisition' minus the 'amount paid'. The 'upfront taxation' applies to the 'ESS interests' that are 'quoted' (the 'listed shares') or the 'ESS interests' that do NOT have the 'real risk of forfeiture'.
  • Deferred taxation: The 'ESS discount' is 'deferred' until the 'deferred tax point'. The 'deferred tax point' is the 'earliest of': the 'cessation of the real risk of forfeiture', the 'sale of the ESS interests', the 'cessation of the employment', or the '15-year limit'. The 'deferred taxation' applies to the 'ESS interests' in the 'unlisted companies' and the 'options' with the 'real risk of forfeiture'.
  • ESS reporting: The 'employer' must report the 'ESS grants' to the 'ATO' through the 'ESS annual report'. The 'employee' must include the 'ESS discount' in the 'tax return' (the 'ESS schedule' in the 'tax return').

For the CGT discount and the cost base treatment, see our Capital Gains Tax Guide →.

Start-Up ESS Concession ($1,000 Exemption)

  • $1,000 exemption: The 'first $1,000' of the 'ESS discount' per 'employee' per 'income year' is 'exempt from the tax'. The 'excess' above $1,000 is included in the 'assessable income' at the 'deferred tax point'.
  • Eligible start-up: The 'company' must be 'unlisted', 'incorporated within 10 years', have 'aggregate turnover below $50 million', and be the 'Australian resident'. The 'ESS interests' must be held for at least '3 years' (the 'minimum holding period').
  • CGT treatment: The 'cost base' of the 'ESS shares' under the 'start-up concession' is the 'market value' at the 'deferred tax point' (or the 'amount included in the assessable income' plus the 'amount paid' for the 'upfront taxation').

For the start-up company tax concessions and the ESIC incentives, see our Venture Capital & ESIC Guide →.

Options & Rights

  • ESS options: The 'options' to acquire the 'shares' (the 'ESS options') are subject to the 'deferred taxation' (the 'options' have the 'real risk of forfeiture' until the 'exercise date'). The 'ESS discount' is calculated at the 'exercise date' (the 'market value' of the 'shares' at the 'exercise' minus the 'exercise price').
  • ESS rights: The 'rights' to acquire the 'shares' (the 'performance rights' and the 'rights to acquire the shares') are subject to the 'deferred taxation'. The 'deferred tax point' is the 'vesting date' (the 'cessation of the real risk of forfeiture').
  • Dividends on the ESS shares: The 'dividends' received on the 'ESS shares' are included in the 'assessable income'. The 'franking credits' (the 'dividend imputation') apply to the 'franked dividends' received on the 'ESS shares'.

For the dividend imputation and the franking credits, see our Investment Income Tax Guide →.