As the owner of a new start-up business, you want the best staff in your team. But unless you are cashed up, this is hard to do. The government recognised this and changed the tax law relating to Employee Share Ownership Plans (ESOP) in 2015 and introduced a range of start-up tax concessions. 

As long as your start-up meets the qualification rules (see below) then you can benefit from these tax concessions for Employee Share Schemes (ESS). This means your employees pay no upfront tax on either shares or options and only pay tax when they profit from their ESS interests. This is normally when they sell the shares or when the company is sold or listed.

Company qualification criteria for ESS start-up concessions:

• Must be a private company (not listed on any exchange).
• Must be less than 10 years old (including all companies in your “group”).
• All group companies combined must turnover less than $50 million.
• Must be an active business (not an investment vehicle).
• Employer company must be an Australian resident taxpayer.

Employee qualification criteria for ESS interests:

• Must hold ESS interest for 3 years (unless they leave the company).
• Each employee cannot hold more than 10% of shares in the company.
• ESS interest must be ordinary (voting) shares (or options over ordinary shares).
• You can only offer up to a 15% discount on the value of the shares.
• Must be available to 75% of employees with over 3 years service.

As long as you meet these criteria, then employees will only be taxed on the Capital Gain (profit based on the increased value of the shares over time) when they sell. 

If you do not meet these criteria, then it might be best to use a deferred tax plan under Div. 83A of the tax rules (which was also changed in 2015). In these plans, employees are taxed but they can defer the tax for up to 15 years.

Alternatively, we custom design ESOP plans to meet specific criteria and to support the business outcome you are trying to achieve. Whether than be to attract, retain and motivate key staff, improve productivity and profit or as part of your Business Succession and Exit plan.

Craig West

Managing Director | Succession Plus

Craig West is a strategic accountant who has over 20 years’ experience advising business owners. His background as a CPA in public practice, provided invaluable experience in the key issues of concern to business owners. Following 6 years of study to gain two masters degrees, Craig focused on Capital Gains Tax (CGT) for business sales advising on strategic management of tax issues. This experience formed a very strong view that business owners (and often their advisers) were unprepared and unaware of the steps required to prepare a business for exit.

Craig now acts as a strategic mentor for mid-market business owners and has written four critically acclaimed books on employee incentives, succession planning, asset protection and exit strategies. Craig has conducted numerous seminars and keynote presentations throughout Australia & internationally, including adviser education programs for the Institute of Chartered Accountants and CPA Australia.