Tax Treatment of Employee Share Schemes for Startups

Employee Share Schemes, Employee Share Ownership Plans (ESOP), and several other forms of Employee Ownership all offer one key benefit – they give employees access to ownership of the business they work for, far better-aligning employees and owners to focus on and benefit from joint business goals. Having employees think and act like business owners can make a substantial difference in the financial performance of the business. The academic research on ESOPs is very clear, employee ownership improves productivity, profitability, employee retention, engagement, and satisfaction – all of which can make a more valuable and successful business.

Governments around the world, including here in Australia, recognise this and have often made several changes to the law surrounding employee share ownership plans. The most recent changes to the taxation concessions attached to these plans were made in 2015. But in 2020 the government has run two separate inquiries to look to improve the utilisation and treatment of employee share ownership plans.

As a large provider in this area, we have made submissions to both inquiries outlining suggested changes to the rules to make employee share plans even more attractive to business owners.

Follow the link to read more about the Parliamentary Inquiry into the tax treatment of Employee Share Schemes. 

Tax Treatment of start-up Employee Share Schemes

If your business can complete the nine requirements to qualify as a start-up under the ESS rules, then the taxation concessions are in fact very generous – upfront taxation is no longer applied and employees only text (under capital gains tax) at the time the shares are sold. In order to meet the test, you must satisfy the following rules:

Employer eligibility:

• Not listed on a public exchange
• Aggregated turnover less than $50m
• Less than 10 years old
• Australian resident taxpayer

Employee Eligibility:

• Less than 10% of shares (and voting rights)
• Employed by holding company or subsidiary
• Less than 15% discount
• Hold for more than 3 years
• Available to 75% of employees with more than 3 years’ service

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.