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Tax Treatment of Employee Share Schemes for Startups


Tax Treatment of Employee Share Schemes for Startups

By , October 19, 2020
Taxation of start-up Employee Schemes

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
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.