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Employee Share Schemes (ESS) Explained


Employee Share Schemes (ESS) Explained

By , September 19, 2021

Employee Share Schemes (ESS) are known by many names and can be surrounded in acronyms – Employee Share Ownership Plans (ESOP) are the most common but they are also known as Employee Share Options plans (ESOP), Employee Savings Plans (ESP), Performance Rights Plan (PRP) and Executive Share Plans (ESP). No matter the name they are all put in place to achieve the same outcomes – attract, retain and motivate key employees, fund succession and retirement or founders/owners, provide a pathway for younger employees to take on equity and ultimately improve the performance, productivity and value of the business.

Employee share options and equity plans have been used in start-ups for many years, mainly as a cash preservation/funding strategy, especially where the business was looking to employ someone they really cannot afford (at this stage of development anyway). Start-up share schemes often enable employees to earn less (salary sacrifice) income but earn equity instead. The government recognised this in 2015 and improved the Employee Share Scheme rules to make ESOP’s easier to implement, reduce the regulation and compliance burden, and improve the tax concessions.

Despite the name, Start-up Share Schemes can actually apply to a wide range of businesses. To qualify for a start-up ESS, the business needs to be less than 10 years old, not listed on any exchange, and turnover less than $50mil – many businesses who would not consider themselves start-ups would qualify.

As long as employees are Australian tax residents, hold less than 10% share in the business (each) and are not given more than 15% discount then they qualify for concessional tax treatment – they only pay capital gains on the shares when they sell or exit, no upfront tax and they can still use the normal CGT 50% discount as long as they hold the shares for at least 12 months.

The plans normally produce improvements in performance including productivity, employee retention, reduced sick days and increased employee engagement to list a few. Having employees think and act like business owners will change the way the business operates.


Find out more about Succession Plus Employee Share Plans or watch our successful case study here.

Craig West

Craig West

Executive Chairman | Succession Plus

Craig West is a strategic accountant who has over 20 years’ experience advising business owners. His background as a CPA in public practice, provided invaluable experience in the key issues of concern to business owners. Following 6 years of study to gain two masters degrees, Craig focused on Capital Gains Tax (CGT) for business sales advising on strategic management of tax issues. This experience formed a very strong view that business owners (and often their advisers) were unprepared and unaware of the steps required to prepare a business for exit.

Craig now acts as a strategic mentor for mid-market business owners and has written four critically acclaimed books on employee incentives, succession planning, asset protection and exit strategies. Craig has conducted numerous seminars and keynote presentations throughout Australia & internationally, including adviser education programs for the Institute of Chartered Accountants and CPA Australia.

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