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ESS start-up concessions: All you need to know


ESS start-up concessions: All you need to know

By , October 17, 2023
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Employee Share Ownership Plans (ESOP) can benefit new business owners, as they allow them to hire the best staff without worrying about the financial burden. In 2015, the government introduced tax concessions for Employee Share Schemes (ESS), making it easier for start-ups to offer ESS options to their employees.

To qualify for these ESS start up concessions, your company must be a private company not listed on any exchange and under ten years old. The turnover of all group companies combined should be less than $50 million, and it must be an active business, not an investment vehicle. The employer company must also be an Australian resident taxpayer.

If your company meets the eligibility criteria, your employees will not have to pay any upfront tax on their shares or options. They will only have to pay tax when they profit from their ESS interests. This usually happens when they sell the shares or the company is sold or listed.

To be eligible for ESS interests, employees must hold them for three years unless they leave the company. Also, each employee cannot have more than 10% of shares in the company. ESS interests must be ordinary (voting) shares (or options over ordinary shares), and you can only offer up to a 15% discount on the value of the shares. ESS interests must be available to 75% of employees with over three years of service. When your company meets these criteria, employees will only be taxed on the Capital Gain (profit based on the increased value of the shares over time) when they sell.

If you don’t meet the eligibility criteria, you can still offer ESS options to your employees using a deferred tax plan under Div. 83A. This plan allows employees to defer the tax for up to 15 years, but they are still taxed. Alternatively, we can design custom ESOP plans to help you achieve specific business outcomes.

The ESS Start-up Concession allows employees to reduce the taxable discount income on their ESS interests to zero. It is only applicable for ESS interests acquired after 30 June 2015. To be eligible for this concession, the following conditions must be met:

  • The ESS interests provided must be in a start-up company.
  • The company providing the ESS interests, which may not be the company issuing them, must be an Australian resident taxpayer.
  • For ESS interests that are shares, the discount must not exceed 15% of their market value when provided.
  • For ESS interests that are rights, the exercise price must be equal to or greater than the market value of an ordinary share in the company when provided.
  • The scheme must be operated so that employees hold the ESS interests (or any share acquired as a result of exercising the interest) for a minimum of three years or until they cease employment.

The minimum holding period can be reduced if a written request is made. The request can be granted if the scheme’s intention was for all ESS interests to be held for three years after acquisition, or if all membership interests in the company were disposed of under an arrangement before the end of the three-year period.

If an employee acquires ESS interests under the Start-up Concession, they can also acquire ESS interests under another concessional or non-concessional scheme if offered by their employer.

Craig West

Craig West

Executive Chairman | Succession Plus

Craig West is a strategic accountant with over 20 years of experience advising business owners. His background as a CPA in public practice has provided invaluable experience in the key issues of concern to business owners.

In March 2014, Craig was appointed Executive Chairman of the SME Association of Australia, Australia’s largest small business organisation representing over 300,000 business owners.

In October 2014, he was awarded the Exit Planner of the Year at the Exit Planning Institute Annual Conference in Texas, USA, due to his innovative development of an exit planning process to help business owners maximise business value and achieve a successful exit.

Craig’s proprietary structure - a Peak Performance Trust - has won the Australia-wide award for the Employee Share Ownership Plan of the year twice in four years.

In November 2018, Craig launched SME Experts in partnership with Mark Bouris’ Mentored on Podcast One and quickly grew the monthly podcast audience to over 26,500 downloads; in October 2019, he released a new podcast focused on medium-sized businesses - Mid-Market Matters.

In July 2021, Craig joined the NSW Committee for STEP (Society of Trust & Estate Practitioners) – focusing on advising families across generations.

Craig has also launched a SaaS platform, Capitaliz (which captures the 21-step process), to assist other advisers internationally deliver advisory services at scale.

In November 2021, Craig was appointed Executive Chairman of NSW Leaders, a business mentoring group for leading NSW businesses.

In July 2022, Craig West received the award of Doctor of Business Administration for his research thesis titled “Examination of the key factors driving business exit options in Australian Small and Medium Enterprises.”

Craig is passionate about encouraging business owners to think strategically, maximise the value of their business and achieve a successful exit.

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