The way that employee share schemes (ESSs) are taxed has changed, so if you've been thinking about putting an ESS in place or issuing shares or options under an existing ESS, now might be the time to do it.

A few of the (relatively) more exciting changes:

  1. Deferred tax. The time at which options are taxed has been deferred to when they are exercised (ie when the employee receives the value) rather than the time they “vest” or become exercisable.  The maximum period of deferral has also been extended to 15 years (from 7). This is a major improvement – basically, qualifying employees won't get a tax bill now until they're actually in the money.
  2. Small start-ups. Further tax concessions will be available to employees of “small” start-ups who receive ESS interests which meet certain conditions. In this case, “small” means:
  1. unlisted;
  2. incorporated for less than a decade; and
  3. with turnover of $50 million or less.


  1. Safe harbour valuation methods. It's been made easier for smaller unlisted companies to value their shares for the purposes of an ESS.

In case you’re still not convinced, the ATO has released a template ESS offer letter and plan rules to make it even easier for employers (particularly start-ups) to establish an ESS involving the grant of options. These should be used with care, however, as they reflect a “plain vanilla” approach and more work will be required to get the right mix of sprinkles to suit your particular situation.

The ESS tax law changes follow ASIC’s introduction last year of class order relief from Corporations Act requirements relating to ESSs.  The regulators are clearly intent on making ESSs less of a minefield and a more attractive proposition for start-ups in particular, in line with government policy which supports employee share ownership as a generally good thing. It's still a bit head-spinning, but at least they're trying.