The Employee Share Scheme (ESS) start-up concession has been a part of Australian Government policy since July 2015. The concession aims to boost Australia’s global competitiveness in the treatment of employee share schemes by giving eligible companies certain benefits. This article provides a comprehensive summary of the ESS start-up concession and its qualifying conditions.
The ESS start-up concession offers a significant reduction in tax liability for qualifying participants. Specifically, it permits eligible employees to reduce their taxable discount income related to their ESS interests to zero, meaning they won’t need to pay any tax on their ESS interest until they decide to sell it. This represents a notable deviation from the usual taxation treatment of employee share schemes. When the ESS interest is eventually sold, Capital Gains Tax (CGT) rules will apply, and a 50% CGT discount could be available if the sale happens at least 12 months after the ESS interests were granted. Please note that this concession is only applicable to ESS interests obtained after 30 June 2015.
Qualifying for the ESS start-up concession requires both the company and the scheme to meet certain criteria:
Company Eligibility Criteria
Aggregated Turnover:
The company offering the ESS interest must have an aggregated turnover of less than $50 million in the income year preceding the year the interest is granted. This includes turnover generated by connected entities.
Unlisted Entity:
The company (and its corporate group) must not be listed on any stock exchange in the year before the ESS interest is offered.
Company Age:
The company (and its connected entities) must be less than 10 years old at the end of the most recent income year.
Company’s Main Business:
The company’s primary business must not be the acquisition, sale or holding of shares, securities or other investments.
Residency:
The company employing the participant must be an Australian resident taxpayer.
Scheme Eligibility Criteria
Share Class:
The ESS interests must be ‘ordinary’ shares or options or rights to acquire ordinary shares.
Minimum Holding Period:
The ESS interests must be held for at least three years (from the date they were acquired) or until the employee leaves the company (whichever occurs first).
Exercise Price:
For ESS interests that are options or rights, the exercise price must be at least equal to the market value of the shares in the company at the date the options were granted.
Share Price:
For ESS interests that are shares, the shares must not be offered for more than a 15% discount on the market value of the shares at the date of grant.
Broad Availability:
At least 75% of the company’s Australian resident permanent employees who have completed at least three years of service must be or at some point must have been entitled to acquire ESS interests under the scheme or another scheme if the company is more than 3 years old.
Participant Eligibility Criteria
Employees or contractors:
Participants must be employed or engaged as contractors by the company or a subsidiary in which the interest is granted.
Maximum Shareholding or Voting Rights:
Participants cannot hold more than a 10% maximum shareholding or voting rights in the company in which the ESS interests are being granted. This takes into account vested and unvested options and combines the current and previous grants.
Understanding these criteria is crucial for both start-ups and employees looking to take advantage of the ESS start-up concession. It offers a promising avenue for companies to attract and retain talent, and for employees to benefit from the growth and success of the businesses they work for.
