Employee Share Schemes (ESS) allow employees to buy shares in their employer’s company.

  1. You may purchase shares commonly called an employee share purchase plan (ESPP).
  2. Alternatively, employees may be provided with the opportunity to buy stock options which give them the right to buy shares at an agreed price and date i.e. employee share option plan (ESOP).

Note your employer will construct a ESS to comply with the Australian tax laws, you will normally receive information on how the plan works and what your options and consequences are.

  • It’s likely then that employees are eligible for tax concessions.
  • The tax rules on ESS applies to employees who are Australian residents from the time the option is granted up to the moment the shares are sold.
  • The rules for ESS before and after July 2015 are different, we will focus on plans post July 2015.

An ESPP will normally comply with the following characteristics:

  • The ESS often provides shares at a discount to employees e.g. employees can purchase via their pay shares up to a certain amount at 85% of the market value.
  • This covers shares normally but can cover stapled securities or rights to acquire either of these.
  • Employees can receive up to a tax-free discount of 15% on shares purchase.
  • Tax law states up to $1,000 worth of shares can be granted a tax-free benefit each year, so long as the employee meets the requirements of the income test and passes other eligibility criteria stated in the ESS.

Your employer may elect to provide a:

  1. Taxed-upfront scheme (simplest for the employee)
  2. Deferred taxed scheme (common and more complicated for the employee)
  3. Start-up scheme (new and with some benefits)

Each of these has a different tax outcome, 1 and 2 your employer will calculate your income tax amount on you ESS discount for you and then later on disposal CGT applies. In 3 you have no income tax on discount instead you are liable for CGT on disposal.

So Step 1 is to determine what type of plan you are part of, this information should come from your employer:

  1. In some instructional correspondence when you are proposed to participate and accept participation in the plan.
  2. Or in the worst case by obtaining the ESS/ESPP/ESOP rules i.e. how the plan works.

Key terminology:

  • Grant – this is when the ESS is offered to you.
  • Exercised – this is when you pay for and own the ESS.
  • Vesting – this is the date when you can own/exercise the ESS.
  • Sale – this is when you sell your share to someone else.
  • CGT – Capital gains tax is payable on the profit from the sale.
  • CGT discount – a 50% discount on the profit from the sale is allowed after 12 months ownership of the shares.

This is an brief and summarised overview of Employee Share Schemes and their tax treatment:

Taxed-upfront schemes

  • Ownership, the grant date is when you own the shares, there is no exercise requirement.
  • You will be taxed on the discount (the market value less the exercise price) in the year in which you acquired the shares. If the shares are given to you for free then the discount is the whole amount.
  • Your Employee Share Scheme (“ESS”) Statement is uploaded by your employer by July 14 of the year following the year in which the taxable event occurs.
  • You PAYG summary and tax portal will show the amount of income you will pay tax on, this is calculated by your employer.
  • You will have to pay tax on this amount at your marginal tax rate, this is a lump sum in your 1st year. Often employees who don’t have the money sell some shares to pay this bill.
  • If you are regularly/annually receiving ESS shares this way then you will likely enter the pay as you go tax instalment (PAYGI) system and pay the estimated amount quarterly.
  • The estimated amount is based on your previous years amount paid.
  • The 12 month ownership period for the CGT 50% discount starts from the grant date i.e. when you first own the shares.

Deferred taxed schemes

  • Shares/options granted after July 2015 are subject to income tax when the option is exercised.
  • No tax is enforced on the grant date of the ESS, assuming the taxing point is deferred to the vesting or exercise dates where income tax on the discount is likely to be payable.
  • There needs to be a Real Risk of Forfeiture to access the deferral i.e. whenever an employee’s entitlement to ESS interests has restrictions on disposal or is subject to Real Risk of Forfeiture, the tax is deferred to whichever of the following situations come first:
  1. The Real Risk of Forfeiture is no longer in effect and the restrictions on the disposal are gone.
  2. When an employee ceases employment or is terminated from a corporation.
  3. Taxation is deferred for up to 15 years, provided the employee satisfies certain conditions under the Real Risk of Forfeiture
  • If the employee disposes the interest within 30 days from the exercise or vesting date, the deferred taxing point is moved to the time of the disposal. There is no gain on the sale as the market value of the interest at the deferred taxing point is used to calculate the assessable income of the employee.
  • Qualified stock options will be taxed upon the sale of shares, Capital Gains Tax (CGT) will be computed accordingly and the CGT discount will apply after 12 months ownership i.e. from the vesting or exercise dates.

Start-up schemes

  • Under the start-up concession, an employee can reduce the taxable discount income relating to their ESS interests to nil.

To be eligible, the following conditions must be met:

  1. The ESS interests you provide are in a start-up company.
  2. Your company (which may not be the company issuing the ESS interests) must be an Australian resident taxpayer.
  3. For an ESS interest that is a share – the discount must be no more than 15% of its market value when you provide it.
  4. For an ESS interest that is a right – the amount that must be paid to exercise the right must be greater than or equal to the market value of an ordinary share in the company when you provide the ESS interest.
  5. The scheme is operated so that employees must hold the ESS interests (or any share acquired as a result of exercising the interest) for a minimum of either:
  1. Three years
  2. Until your employee ceases employment
  • You can make a written request to reduce the minimum holding period.
  • Under this scheme you may not need to report an ESS discount amount in relation to the acquisition of the shares in the income year if all conditions are met.
  • CGT on a later sale will apply, your start date for CGT is the Grant date (not exercise).


This is general information and not advice, if you are part of an ESS please contact us for:

  1. Tax advice and explanation of options.
  2. Wealth advice where we can assess your current situation, options and exposures and devise a strategy to move forward.

You should not act on the information above without obtaining specific tailored advice relating to your situation.