• Concessional schemes (concessional tax treatment can apply)

    If you acquire ESS interests under one of the concessional schemes, you can receive concessional tax treatment for your discount if you and the scheme meet:

    • all general conditions for all concessional schemes
    • conditions specific to the scheme and the particular ESS interests.

    The general conditions include the ownership and voting rights test that applies to you.

    On this page:

    Taxed-upfront scheme: Eligible for reduction

    If you acquire ESS interests under this scheme, you may be entitled to reduce the discount amount that must be included in your assessable income by up to $1,000.

    To be entitled to the concession, you will need to meet:

    • the ownership and voting rights test
    • an income test (your taxable income after adjustments must be $180,000 or less).

    See also:

    Start-up concession (ESS interests acquired after 30 June 2015)

    Your employer will advise if you are eligible to receive the start-up concession for your ESS interests.

    If you are eligible, the start-up concession is available to you provided that you meet the 10% ownership and voting rights test.

    The concession allows you to reduce your taxable discount income to nil. However, you may be subsequently assessable under the capital gains tax provisions when your interests are sold.

    Example 1: Shares acquired under the start-up concession (ESS interests acquired after 30 June 2015)

    Senka has just started working for Millie's Bears Pty Ltd. As part of her employment contract, on 1 September 2015 she is provided with 2,500 shares under an ESS at a 15% discount. Millie's Bears Pty Ltd is a start-up company and has advised Senka that all of the conditions for the start-up concession have been met.

    Senka does not need to report an ESS discount amount in her 2016 tax return (the income year she acquires the shares). However, when she disposes of the shares she will need to account for the sale under the capital gains tax provisions.

    End of example

     

    Example 2: Rights acquired under a start-up concession (ESS interests acquired after 30 June 2015)

    Phoebe has just started working for Truffles Pty Ltd. As part of her employment contract, on 10 October 2015 she is provided with 1,500 options under an ESS. The exercise price of the options is $1.20 per option and the market value of an ordinary share in Truffles Pty Ltd on the date the options are acquired is $1.15. Truffles Pty Ltd is a start-up company and they advise Phoebe that all of the conditions for the start-up concession have been met.

    The company provides Phoebe with the following details:

    • Number of options: 1,500
    • Exercise price of each option: $1.20
    • Market value of an ordinary share on the date of acquisition: $1.15
    • Acquisition date of the options: 10 October 2015

    As the exercise price of an option is higher than the market value of an ordinary share in Truffles Pty Ltd at the time Phoebe acquires the options and the remaining conditions for the start-up concession have been met, Phoebe does not need to report the ESS discount in her 2016 tax return (the income year she acquires the options). However, when she disposes of the options or the shares she acquires if she exercises the options, she will need to account for the sale under the capital gains tax provisions.

    End of example

    Salary sacrifice: Tax-deferred scheme

    If you acquire ESS interests under this scheme, the tax on the discount you receive on your interests will be deferred until the income year in which the deferred taxing point occurs, provided the conditions are met.

    The conditions are:

    • under salary-sacrifice arrangements, you acquire no more than $5,000 worth (per year) of shares or stapled securities in your employer (or any holding company of your employer)
    • you meet the ownership and voting rights test.

    Real risk of forfeiture: Tax-deferred scheme

    Some schemes include terms that create a risk that your ESS interests will be lost or forfeited. If you have acquired ESS interests under this type of scheme your interests are taxed in the income year the deferred taxing point occurs if:

    • you meet the ownership and voting rights test
    • your individual circumstances do not prevent you from being eligible because there is no risk that you will lose your particular interests.

    In some circumstances you will not be able to defer tax even though you have participated in a tax-deferred scheme. You need to consider your individual circumstances to determine whether your ESS interests are in fact at a real risk of forfeiture. For example, if your employer allows only retiring employees to keep their interests when they cease employment, then there will be no risk that you will lose any interests that you acquire after the time you notify your employer of your retirement date.

    See also:

    Disposal restrictions: Tax-deferred scheme (ESS interests acquired after 30 June 2015)

    If you acquire an ESS interest that is a right, the tax on the discount will be deferred until the deferred taxing point occurs if, at the time you acquired the right under the scheme:

    • you are restricted from immediately disposing of your ESS interest
    • the scheme's rules state specifically that the scheme is a tax-deferred scheme
    • you meet the 10% ownership and voting rights test.

    Deferred taxing point

    If you acquire ESS interests under a tax-deferred scheme, you will be assessed in the year the deferred taxing point occurs. The amount assessed will be the market value of the ESS interests at the deferred taxing point, reduced by the cost base of the ESS interests.

    Shares

    The deferred taxing point for a share or stapled security is the earliest of the following:

    • when there is no real risk of forfeiture and the scheme no longer genuinely restricts disposal of the share.
    • when you cease the employment in respect of which you acquired the share
    • 15 years after you acquired the share (or seven years for ESS interests acquired before 1 July 2015).

    Rights

    The deferred taxing point for a right is the earliest of the following:

    • when there is no real risk of forfeiting the right and the scheme no longer genuinely restricts disposal of the right
    • when you cease the employment in respect of which you acquired the right
    • for ESS interests acquired after 30 June 2015    
      • when you exercise the right, there is no real risk of forfeiting the resulting share and the scheme no longer genuinely restricts disposal of that share
      • 15 years after you acquired the right
       
    • for ESS interests acquired before 1 July 2015    
      • when there is no real risk of forfeiting the right or underlying share, and the scheme no longer genuinely restricts exercise of the right or disposal of the resulting share
      • 7 years after you acquired the right.
       

    Example: Tax-deferred scheme – deferred taxing point

    Zoran is employed by Poppy Seed Ltd. On 30 July 2015 he acquires rights to shares in Poppy Seed Ltd under a tax-deferred scheme.

    Zoran will forfeit the rights if he stops working for Poppy Seed Ltd before 30 July 2016. His rights are therefore at a real risk of forfeiture. The ESS does not permit disposal of the rights.

    On 30 July 2016 there is no longer a real risk of Zoran losing his rights. The deferred taxing point does not happen at this time. On 30 November 2016, while still employed by Poppy Seed Ltd, Zoran exercises his rights and acquires shares. As there is no risk that Zoran will forfeit the shares and there are no restrictions on the disposal of those shares, the deferred taxing point happens at that time. Zoran has to declare his discount in his 2017 tax return.

    End of example

    The 30-day rule can change the deferred taxing point

    This rule only applies to tax-deferred schemes. It does not apply to taxed-upfront schemes.

    Where you dispose of an ESS interest (or the share you acquire on exercise of a right) within 30 days after a deferred taxing point occurs, the deferred taxing point becomes the date of that disposal (this is called the 30-day rule).

    For example, a deferred taxing point occurs on 10 March 2016 and the employee disposes of the ESS interest on 29 March 2016. As the disposal is within 30 days, the deferred taxing point becomes 29 March 2016.

    See also

    Last modified: 21 Dec 2015QC 47641