Key ESS changes in detail
Changes to the tax treatment of employee share schemes (ESS) took effect on 1 July 2015.
These changes apply to ESS interests (shares, stapled securities and rights to acquire them) issued on or after that date. There are changes to some existing rules as well as new concessions for employees of start-up companies.
Employment ceasing on or after 1 July 2022 will no longer be a deferred taxing point.
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Changes to existing rules
The main changes to the existing rules are to the:
- timing of the deferred taxing point for ESS interests acquired under tax-deferred schemes, including increasing the maximum deferral to 15 years
- test for significant ownership and the voting rights limitations have been eased
- tax refund, a refund is possible in some circumstances where an employee acquires rights but chooses not to exercise them.
Deferred taxing point
The taxing point in tax-deferred schemes has become the earlier of:
- when there is no risk of forfeiting the ESS interests and any restrictions on their sale are lifted
- in the case of rights, when the employee has exercised them and there is no risk of forfeiting the resulting share and no restriction on disposing of that share
- when the employee ceases the relevant employment (employment ceasing on or after 1 July 2022 will no longer be a deferred taxing point.)
- 15 years after the ESS interests were acquired.
Significant ownership test
The significant ownership and voting rights test has changed. All interests in the company, including rights to acquire shares, are taken into account (previously only share ownership was considered). However, an employee can acquire up to 10% ownership in the company or control up to 10% of the voting rights before their holding is considered significant and makes them ineligible for concessional treatment.
A refund of tax paid at the taxing point is possible if an employee acquires rights and later chooses not to exercise them or allows them to be cancelled. However, as before, a refund is not available if the employee share scheme is structured to directly protect the employee from a fall in the market value of the shares.
Concessions for start-up companies
The discount provided for eligible ESS interests will not be taxed under the ESS regime, as long as the eligibility criteria are met.
Any gain or loss on disposal of the rights or shares will be assessed under the capital gains tax regime. When working out if the 50% CGT discount applies, the period of ownership of a share acquired on exercise of a right is taken to have started when the right was acquired.
Eligibility criteria for start-up concessions
In addition to the general conditions that apply to all concessional schemes, the following specific conditions apply to the start-up concession:
- Must not be listed on any stock exchange.
- All companies in the corporate group must have been incorporated for less than 10 years.
- Aggregated annual turnover must not exceed $50 million.
- The employing company must be an Australian resident company.
- Employees must hold ESS interests for at least three years.
- A share must be provided at a discount no greater than 15% of the market value.
- A right must have an exercise price (or strike price) that is greater than or equal to the market value of an ordinary share in the issuing company.
Assistance for start-up companies
There are approved market valuations methods start-up companies can use to value their unlisted shares.
We have developed a set of standard documents to help start-up companies establish an ESS, including a model option plan and a standard letter for offering employees an ESS interest in the company.
Tax treatment of employee share schemes (ESS) changed on 1 July 2015. Some existing rules as well as new concessions for employees of start-up companies changed.