ESS start-up concessions: All you need to know

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.

Dr Craig West

Founder & Chairman | Succession Plus

Dr Craig West is a strategic accountant who has over 20 years of experience advising business owners.

With a background as an accountant in practice and two master’s degrees, Craig formed a strong view that the majority of business owners (and often their advisers) were unprepared and unaware of the steps required to prepare for exit. He then designed and documented a unique 21-Step Business Succession and Exit Planning process to assist owners and their advisers in navigating this process.

Craig now acts as a strategic business and financial mentor for mid-market business owners. Craig has written four critically acclaimed books educating business owners on employee incentives, succession planning, asset protection, and exit strategies. Additionally, he has completed doctoral research on Employee Share Ownership Plans (ESOPs) for succession.

Craig is a Member of the Forbes Business Council where he leverages his extensive experience to contribute valuable insights on helping business leaders navigate the complexities of growing and exiting their businesses.

In April 2024, the Exit Planning Institute admitted Craig to the International Exit Planning Circle of Excellence.