Australia: Sharing success: tax concessions for start-ups' employee share schemes

Last Updated: 21 August 2013
Article by David Landy

Key Points:

Submissions on proposed reform options of the tax treatment of employee share schemes are due by Friday 30 August 2013.

How can employee share schemes be made more attractive to employees of start-up companies?

Employee share schemes (ESS) allow start-up companies to offer economic benefits to employees without eating up the companies' cash. There is some tax relief for participating employees, but it has been criticised as being too complex and financially unattractive. Now the Government is targeting three of those issues:

  • the requirement that employees pay tax at their highest marginal rate on the discount that they receive when they acquire shares under an ESS (currently subject to a $1,000 concession);
  • the taxing point or timing of payment of tax;
  • the method of valuing shares issued under an ESS.

Because these reforms will be targeted at start-up companies, the Government is also looking at an appropriate definition of "start-up company".

What is a "start-up" company?

The Government has proposed the following definition of "start-up" company:

  • a business with no more than 15 employees; and
  • has an aggregated turnover of less than $5 million; and
  • is not a subsidiary, owned or controlled by another corporation; and
  • has been in existence for five or seven years (or less); and
  • is not undertaking certain excluded activities or is providing new products, processes or services based on the development and commercialisation of intellectual property; and
  • is unlisted; and
  • has the majority of its employees and assets in Australia.

Tax treatment

The Government proposes a number of different tax treatments of start-up ESSs:

  • deferring the taxing point or payment of tax;
  • taxing ESS for start-up companies at a lower rate; and
  • increasing the ESS up-front discount.

These are summarised in this table:

Acquisition time Vesting time* Sale or disposal time
Current arrangements for eligible ESS Income tax paid at marginal rates on the discount received (ie, the difference between the value of the securities and any amount paid for the securities). $1,000 concession available. Nil. CGT is paid on the difference between sale price and acquisition value. CGT discount may be available.**
Option 1: Defer the taxing point Nil.

Income tax paid at marginal rates on the market value at vesting less consideration paid. No $1,000 concession.

No CGT if sold within 30 days of vesting

CGT is paid on the difference between sale price and vesting price. CGT discount may be available.**
Option 2: Defer payment of tax Income tax at marginal rates is calculated (but not paid) on the discount received. Nil.

Income tax (as calculated at acquisition) paid at marginal rates. No $1,000 concession.

CGT is paid on the difference between sale price and acquisition value. CGT discount may be available.**

Option 3: Reduced rate of taxation Income tax paid at 15 per cent on the discount received. $1,000 concession available. Nil. CGT is paid on the difference between sale price and acquisition value. CGT discount may be available.**
Option 4: Increase the concession Income tax paid at marginal rates on the discount received. $5,000 concession available. Nil. CGT is paid on the difference between sale price and acquisition value. CGT discount may be available.

* Vesting would occur when the employee exercises the options, when the employment of the employee ceases, or seven years after the share or rights were acquired (whichever comes first)

** The CGT discount is available if the security is held for more than 12 months.


The Government has proposed four possible valuation methodologies for ESSs of start-up companies:

  • net asset backing valuation: where it is not possible to obtain a market valuation of the company's shares, divide the company's net assets by the number of existing shares and ESS shares;
  • fair value under AASB2 (Share-based Payment): generally accepted option pricing models that take into account, as a minimum: exercise price, option life, current price of underlying shares, expected share price volatility, expected dividends (if any) and the risk-free interest rate over the option life;
  • alternative formula-based valuations: widely accepted alternative valuation methodologies for valuing rights, including the Monte Carlo option pricing model and the Binominal option pricing model;
  • retain the current methodology but update the statutory tables.

When will it happen?

The Government is seeking submissions on the Discussion Paper and expressions of interest in participation in stakeholder consultations by Friday, 30 August 2013. It is expected that the outcome of the consultations and review will be reported by December 2013. After that, of course, any new policy would have to be embodied in changes to the tax legislation, through the normal Parliamentary processes.

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

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