Under an employee share scheme, the discount an employee receives is assessable income under Division 83A of the ITAA 1997. The start-up concession changes everything: for eligible companies under 10 years old with turnover below $50 million, a qualifying grant is not taxed as income at all, and the employee instead pays CGT when they eventually sell. Employers must issue ESS statements by 14 July and lodge the ESS annual report with the ATO by 14 August.
Startups pay for talent with equity because they cannot match corporate salaries. Treasury's own analysis found small companies using an employee share scheme paid roughly 25 to 53 cents in share-based payments for every wage dollar, against about 3 cents in large companies. Equity is not a perk in a startup; it is a second payroll. Which makes employee share scheme tax a founder's problem, not just an employee's.
Designed well, an ESOP delivers options that cost employees nothing in tax until there is real money on the table. Designed casually, it hands staff a tax bill on paper gains they cannot sell. This guide covers how employee share schemes are taxed in Australia, how the start-up concession works, the deferred taxing points, and the reporting deadlines founders keep missing. It is written for the founders we work with through our startup accounting and advisory practice, and for their employees deciding what an offer letter is really worth.
How Are Employee Share Schemes Taxed in Australia?
When an employee receives shares or options at a discount to market value, that discount is assessable income. In a taxed-upfront scheme the discount is taxed in the year of grant, with a reduction of up to $1,000 for employees whose relevant income is $180,000 or less. In a tax-deferred scheme, tax is postponed to a later taxing point. Startups have a third path: the start-up concession.
The framework sits in Division 83A of the ITAA 1997, and employees see the outcome each year at item 12 of the individual tax return, usually pre-filled from the employer's reporting. The discount is ordinary income, taxed at marginal rates, which is why an untimed scheme can produce tax on value an employee cannot yet bank.
Which regime applies is a design outcome, not luck. The scheme rules, the offer documents and the company's eligibility at the date of grant decide whether an employee is taxed now, later, or, under the start-up concession, effectively only at sale. That design work belongs in the same conversation as your cap table and your tax planning, before the first offer letter goes out.
What Is the ESS Start-Up Concession?
The start-up concession lets employees of eligible companies receive options or shares without the discount being taxed as income. To qualify, the company must be unlisted, incorporated within the last 10 years, with aggregated turnover below $50 million, and an Australian resident. Options must have an exercise price at or above market value; shares can carry a discount of up to 15 per cent. Interests must generally be held for 3 years.
The conditions are set out on the ATO's start-up concession page, and the effect is worth restating: the taxable discount is reduced to nil. The employee's cost base for CGT purposes is what they actually paid, and tax arrives once, at sale, under the CGT rules rather than as salary-like income. Additional general conditions apply, including limits on how much of the company any one employee can hold, so eligibility should be confirmed grant by grant, not assumed scheme-wide.
The condition that does the most work in practice is the option exercise price: it must be at or above the market value of an ordinary share at grant. That makes a defensible valuation of the company the foundation of the whole concession. Getting that valuation right, and papering it, is the difference between a concession that holds and one that unwinds in due diligence at your Series A, when the acquirer's advisers re-test every historical grant.
When Is Tax Payable Under a Deferred Scheme?
In a tax-deferred scheme, tax falls due at the earliest deferred taxing point: when there is no longer a real risk of forfeiture and disposal restrictions lift, when options are exercised, or at 15 years from grant at the latest. Since 1 July 2022, ceasing employment is no longer a taxing point. If the employee sells within 30 days of a taxing point, the sale date becomes the taxing point.
The mechanics are on the ATO's tax-deferred schemes page. The 2022 removal of cessation of employment as a taxing point fixed the old trap where leaving a job triggered tax on shares that still could not be sold. The 30-day rule is the useful one for employees to remember: sell promptly after a taxing point and income tax is assessed on the actual sale outcome rather than a paper valuation.
For employees, the deferred regime still means income tax at marginal rates on the discount at the taxing point, with CGT applying only to growth after that. How that lands in an individual return, alongside salary, levies and offsets, is the kind of year-specific question our personal tax team works through with employee clients each July.
Worked Example: Sarah's 20,000 Options
Sarah is a senior engineer at an unlisted software company incorporated in 2021 with $4 million turnover. On 1 July 2025 she is granted 20,000 options with an exercise price of $1.00, equal to the independently assessed market value of an ordinary share at grant, vesting over four years. She exercises in July 2028 when shares are worth $3.00 (paying $20,000), and a trade sale in December 2029 delivers $6.00 a share: $120,000.
| Event | With start-up concession | Deferred scheme (no concession) |
|---|---|---|
| Grant, July 2025 | $0 tax | $0 tax |
| Exercise, July 2028 | $0 tax | Discount of $40,000 taxed as income: about $18,800 at a 47% marginal rate, with no cash from the shares to pay it |
| Sale, December 2029 | Capital gain $100,000; 50% CGT discount leaves $50,000 assessable: about $23,500 | Capital gain $60,000 on the reset cost base; 50% discount leaves $30,000 assessable: about $14,100 |
| Total tax | About $23,500, all payable after the exit | About $32,900, with $18,800 due a year before the exit |
Figures assume a 47 per cent top marginal rate including the Medicare levy for the relevant years and are rounded for illustration. The comparison understates the concession's real advantage: the deferred-scheme employee owes $18,800 in the 2028-29 year on shares that are still unsaleable. Dry tax bills like that are how option holders end up resenting the scheme that was meant to retain them.
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We test start-up concession eligibility, coordinate the valuation and set up the ESS reporting before the first grant is signed.
Contact UsWhat Are the ESS Reporting Deadlines?
Employers with ESS activity in a financial year must give each affected employee an ESS statement by 14 July, and lodge the ESS annual report with the ATO, electronically, by 14 August. Reporting is triggered by grants under taxed-upfront and start-up concession schemes and by deferred taxing points under deferred schemes.
The dates come from the ATO's ESS employer reporting requirements, and they arrive in the same fortnight as PAYG summaries and the year-end close. Founders discover the obligation in the second week of July, usually via an employee whose myTax pre-fill looks wrong. Put both dates in the compliance calendar the day the scheme is signed; we run them inside our tax compliance service alongside the company's other lodgements.
Designing a Scheme Founders Can Defend
Three design points separate schemes that survive scrutiny from schemes that create it. First, the valuation: the concession's exercise-price condition stands or falls on the market value of an ordinary share at grant, so use a defensible methodology and document it contemporaneously. Second, the legal wrapper: offer documents must satisfy the Corporations Act's employee share scheme provisions in Division 1A of Part 7.12, in force since 1 October 2022 with ASIC relief instruments smoothing the technical edges. That drafting is legal work, and we say so plainly: engage a lawyer for the plan rules while we handle the tax and reporting side. Third, the cap table: model dilution and vesting against your funding plan, the same discipline we apply in forecasting engagements for SaaS and technology clients.
In our experience with startup clients, the schemes that work are boring: standard four-year vesting, market-value strike prices, one valuation refreshed at each raise, statements out every 14 July. The exotic structures we are occasionally asked to bless tend to fail one condition quietly and expensively. There is also an investor-side adjacency worth knowing: investors in an early stage innovation company can access a 20 per cent tax offset capped at $200,000 a year ($50,000 maximum investment for non-sophisticated investors), which changes the conversation with angel investors at the same raise where the ESOP is set. Equity compensation also flows through your accounts as share-based payments, a close cousin of the issues in our SaaS revenue recognition guide, and eventual exits interact with the CGT changes tracked in our 2026 CGT reform coverage.
Key Takeaways
- ESS discounts are assessable income under Division 83A, but the start-up concession reduces a qualifying discount to nil, leaving only CGT at sale.
- Concession eligibility is tested at grant: unlisted, under 10 years old, turnover below $50 million, options struck at or above a defensible market value, 3-year holding.
- Deferred schemes tax the discount at the earliest taxing point (15-year maximum); leaving a job has not been a taxing point since 1 July 2022, and the 30-day sale rule can align tax with actual proceeds.
- Diarise 14 July (employee statements) and 14 August (ATO annual report) from the day the scheme is signed.
- The valuation is the load-bearing wall: refresh it at each raise and keep the workings.
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Concession eligibility, valuation coordination and ESS reporting, handled alongside your cap table and forecasts.
Book a MeetingDisclaimer: The information provided in this article is general in nature and does not constitute specific tax, legal, or financial advice. Employee share scheme outcomes depend on scheme documents, valuations and each employee's circumstances, and plan drafting requires legal input. We recommend seeking professional advice tailored to your individual circumstances. 42 Advisory is a CPA firm and Registered Tax Agent.
Frequently Asked Questions
Is tax payable on employee share schemes?
Yes. The discount between what you pay and market value is assessable income, taxed either in the year of grant (taxed-upfront schemes) or at a deferred taxing point. The exception is the start-up concession, where a qualifying discount is not taxed as income and the CGT rules apply when you sell.
What is the income test for the $1,000 employee share scheme reduction?
Employees in taxed-upfront schemes can reduce the assessable discount by up to $1,000 where the total of their taxable income, reportable fringe benefits, reportable super contributions and investment losses is $180,000 or less for the year.
What happens to my employee shares when I leave the company?
Since 1 July 2022, ceasing employment is no longer a deferred taxing point, so leaving does not itself trigger tax. What happens to the shares or options depends on your scheme's rules: unvested interests commonly lapse, and vested interests may be kept or bought back. Check the plan documents before you resign, not after.
What are the tax implications of selling ESS shares?
Sale is a CGT event. Under the start-up concession your cost base is what you paid, and the 50 per cent CGT discount can apply where the holding period conditions are met. Under other schemes, value taxed as income sets a new cost base, and CGT applies to growth beyond it. Selling within 30 days of a deferred taxing point shifts the taxing point to the sale itself.
Are employee share schemes worth it?
For companies, Treasury's analysis links ESS use with lower staff churn and higher productivity, and equity stretches a startup's payroll budget. For employees, the value depends on the company's prospects, the scheme design and the tax path of the specific grant. An offer under a start-up concession scheme with a market-value strike is a materially better instrument than the same option count without it.
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Geoffrey Tulett
Geoffrey Tulett is a Director of 42 Advisory, helping business owners navigate complex financial and strategic decisions with clarity, confidence and commercial insight. With experience across Australia, New Zealand and Asia, Geoff brings deep expertise in business valuations, mergers and acquisitions, corporate finance, capital raising, R&D, financial modelling and strategic advisory. Geoff has worked alongside founders, entrepreneurs and private business owners at every stage of the business lifecycle — from start-up and growth through to succession planning, investment and exit. He has assisted businesses in securing funding, evaluating strategic opportunities, improving performance and preparing for successful transactions. His advisory approach is built on a simple belief: a business owner's ambitions for their business should work in harmony with their ambitions for life. Geoff works closely with clients to help them build more valuable, scalable and resilient businesses while making informed decisions that support their broader personal and financial goals. At 42 Advisory, Geoff combines technical expertise with a practical, partnership-driven approach, helping clients cut through complexity and focus on the decisions that create long-term value.