Employee Share Schemes [ESS] and Employee Share Option Plans [ESOPs] are simple tax planning tools that can help drive growth in both start-ups and established businesses. Employers usually offer ESOPs to key employees as a way of rewarding and retaining key employees whose dedication and expertise have become fundamental to the business.

what are ESS and ESOP?

In an ESS, the scheme gives an employee a ‘right’ to purchase shares, known as ‘subscription’, in the company they work for. The employee will be invited to subscribe for the shares at a certain price. The company may choose to set a subscription price at fair market value, a nominal amount or somewhere in the middle. Any restrictions on the shares and any discount to market value will inform how the employee is taxed.

In an ESOP, the company grants an option to purchase shares in the company. The difference between an option and a right, is that an option does not grant them any of the rights a shareholder has, such as rights to vote, dividends and assets on winding up. Rather an option holder can exercise the option at a future date to subscribe for shares.


The potential benefits of an ESS or ESOP are twofold:

  1. It can be a great method to incentivise employees to help a business grow by making them part-owners of the business – while costing the company no cash.
  2. Enticing employees to stay with the company longer – especially key executive staff or salespeople

A key reason why ESSs and ESOPs are so popular with start-ups is the special tax concessions that are available to the employees of eligible start-ups. If your start-up meets the eligibility criteria below, your employees will be taxed only when they make a financial gain [i.e. profit] from their ESS or ESOP interests.

eligibility criteria

The following criteria must be satisfied to receive special tax concessions

  1. Shares cannot be listed on a stock exchange
    Your company’s shares, and the shares of any group company, are not listed on a stock exchange.
  2. Company incorporation
    Your company and all group companies were incorporated in the last 10 years.
  3. Aggregated turnover
    In the previous income year, the aggregated turnover of your company, and all group companies, was less than $50 million.
  4. Australian residency
    The employing company was incorporated in Australia.
  5. Company’s predominant business
    The company’s main business is not investing in other shares or investments [e.g. an investment bank].

how to implement

Once you have determined your eligibility you can then offer ESS interests to your employees by taking the following steps:

  1. The shareholders, board of directors or both must approve the company implementing the ESS and the plan rules which govern the ESS. The company constitution or shareholders agreement will set out the type of approval you require.
  2. The board of directors will pass a resolution to approve an offer of shares or options to a particular employee.
  3. The company will then prepare and send to the employee:
    • An offer letter. The letter will set out the number of shares or options that the company is offering to the employee, the price [or exercise price] and vesting conditions;
    • The plan rules which govern the ESS. The plan rules will cover what happens to an employee’s shares or options if they cease working with the company and, for option plans, how and when they can exercise their options.
  4. The employee accepts the offer by signing the offer letter and returning it to the company.

 The company will then:

  1. If issuing options under an ESOP:
    • Update the company’s option holders register;
    • Update the company’s capitalisation table
  2. If issuing shares under an ESS:
    • Employee pays for the shares at the time of accepting the offer;
    • Employee signs a deed of accession to the company’s Shareholders Agreement [if it has one];
    • The Company updates the members register and issue your employee with a share certificate
    • The company updates their capitalisation table
    • The company notifies ASIC with updates.

tax implications

It is important that the employer understands the tax implications for the employee. While it can be a great motivator, it can be a rude shock if the wrong scheme is used, and the employee gets a large tax bill.

Before July 2015, an employee who entered into an ESOP had to pay tax at the time they received those shares or options even though, at that time, they had not received any financial benefit from the shares or options. That meant the employee was liable to pay tax each time the shares vested, even if they did not end up exercising their purchase option to pay for the shares.

Under the new system, employees will now only pay tax on their shares or options when they receive a financial benefit [i.e. when the employee sells the shares].

we’re here to help!

If you are interested in taking advantage of the Employee Share Schemes or Employee Share Option Plans and offering your key employee’s options in your company, get in touch with our legal team on 1300 BDEPOT or legal@businessdepot.com.au.


general advice disclaimer

The information provided on this website is a brief overview and does not constitute any type of advice. We endeavour to ensure that the information provided is accurate however information may become outdated as legislation, policies, regulations and other considerations constantly change. Individuals must not rely on this information to make a financial, investment or legal decision. Please consult with an appropriate professional before making any decision.