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A Complete Guide to Employee Share Schemes and Tax in Australia
March 23, 2025 |
Employee Share Schemes (ESS) are a great way for companies to reward their staff. By giving employees shares or the option to buy them at a discount, businesses help their workers feel like part-owners, making them more motivated and committed to the company’s success. It’s an exciting opportunity, but many employees don’t realise that these rewards come with tax obligations. Even though it may feel like a gift, the tax office still sees it as income, meaning employees may have to pay tax on it.
Over the years at Investax, we have seen many clients caught off guard when they receive a tax bill for their ESS. Without proper planning, what seemed like a great benefit can turn into a financial headache. In this article, we will cover the key tax rules around ESS so readers can better understand their obligations and avoid any surprises.
Do I Have to Pay Tax for My Employee Share Scheme?
Yes, in most cases, you will have to pay tax on your Employee Share Scheme (ESS). The tax you pay depends on the type of scheme your employer offers. If your ESS is a taxed-upfront scheme, you will need to pay tax on any discount you receive in the year you acquire the shares or rights. If it is a tax-deferred scheme, you won’t pay tax immediately, but instead, at a later taxing point, such as when you sell the shares or when restrictions on selling them are lifted. Some employees may be eligible for the start-up concession*, which means they don’t pay tax on the discount but might have to pay capital gains tax (CGT) when selling the shares. Understanding how your ESS is taxed is important to avoid unexpected tax bills.
Will I Get an ESS Statement from My Employer?
If you have participated in an employee share scheme (ESS) and are eligible, your employer will inform you whether the scheme falls under the start-up concession, taxed-upfront (eligible for reduction), or tax-deferred category. This helps you determine whether you need to pay tax on any discounts received in the year you acquire the ESS interests or at a later date.
Your employer will provide you with an ESS statement, which details the discount amounts you need to include in your taxable income for each financial year.
How Do I Know If I Have an ESS Reporting Obligation?
Companies must provide an ESS Statement to employees by 14 July and submit an ESS Annual Report to the ATO by 14 August each year if any of the following happened during the tax year:
- Employees received shares, options, or rights at a discount, and either:
- They were taxed upfront when granted, or
- A past grant reached its deferred taxing point.
- The company issued options or shares under an ESS Start-up scheme.
- The company issued shares under the $1,000 tax-exempt scheme.
For public companies, the tax point for Performance Rights usually happens when employees exercise their rights and can sell the shares. However, if there was a restriction at the time of the grant (such as a company-imposed rule or insider trading policy), tax is delayed until that restriction is lifted.
What is the 30-Day Rule for ESS?
The 30-day rule applies to tax-deferred Employee Share Schemes (ESS) and affects when tax is payable. If you sell or dispose of your ESS shares within 30 days of the deferred taxing point*, the tax event shifts to the date of sale instead of the original taxing point.
For example, if your deferred taxing point was 5 June, but you sold your shares on 2 July, the taxing point moves to 2 July instead. This is important because it can push your tax obligation into the next financial year, affecting when and how much tax you need to pay.
Employers must consider the 30-day rule when reporting ESS income. If they are aware of the sale before issuing the ESS statement, they must update it to reflect the correct year. If they find out after issuing the statement, they must provide an amended ESS statement to the employee and update the ESS annual report submitted to the ATO.
Understanding the 30-day rule is important as it can shift tax obligations between financial years and impact reporting requirements.
Do I Have to Pay Any Capital Gains Tax If I Sell My ESS?
Yes, you may have to pay capital gains tax (CGT) when you sell your Employee Share Scheme (ESS) shares or rights after the taxing point. Once the taxing point occurs, the amount reported in your ESS statement as assessable income becomes your cost base for CGT purposes. This means when you sell the shares, CGT is calculated on the difference between the sale price and this cost base.
For tax-deferred ESS schemes, the taxing point resets the cost base of the ESS interest to its market value at that time. This reset cost base is the amount that was included as assessable income in your tax return. If you later sell the shares for a higher price, you will make a capital gain subject to CGT. If you hold the shares for more than 12 months from the new acquisition date (i.e., the deferred taxing point), you may be eligible for the 50% CGT discount, which reduces the taxable capital gain.
For ESS interests under the start-up concession, the cost base is generally the amount paid to acquire the shares. If the shares were received for free, the cost base would be zero. When you sell these shares, CGT applies to the full sale price. However, if you hold them for more than 12 months, you may be eligible for the 50% CGT discount, which reduces the taxable capital gain
Can My Trust Hold My ESS?
Yes, your trust can hold ESS shares or rights, but the tax obligation remains with you if the ESS interests were provided due to your employment. This means that even if your family trust or company receives the shares, you must include the discount in your taxable income, not the trust or company.
For example, if your employer provides you with ESS shares and you transfer them to a trust, the tax law treats it as if you still received them directly. Your trust won’t need to report anything, but you are responsible for paying tax on the discount.
If the ESS interests are later forfeited or lost, you may be able to amend your tax return to remove the discount from your assessable income, provided you meet the refund conditions.
Conclusion
Employee Share Schemes (ESS) don’t have to be complicated if you stay informed and plan ahead. Understanding how your ESS works, when tax applies, and what to expect in the future can help you avoid surprises. Issues often arise when employees receive ESS benefits but then forget about them, leave their job, or struggle to get help from payroll. When this happens, tax obligations can become confusing, leading to unexpected tax bills and missed opportunities to minimise tax.
At Investax, we specialise in helping employees navigate their ESS tax obligations with confidence. Whether you need guidance on tax planning, capital gains tax, or reporting requirements, our experts can ensure you stay compliant while making the most of your ESS benefits. Contact us today to discuss your situation and get personalised advice tailored to your needs.
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Glossary
Start-Up Concession – The start-up concession applies to ESS interests acquired after 30 June 2015 and allows eligible employees to receive shares or rights tax-free at the time of acquisition. To qualify, the employee must meet the 10% ownership and voting rights test. While there is no tax on the discount received, employees may still need to pay capital gains tax (CGT)when they sell their shares in the future. Employers will inform employees if they are eligible for this concession.
Deferred Taxing Point – In a tax-deferred Employee Share Scheme (ESS), employees don’t pay tax when they receive shares or rights. Instead, tax is delayed until a deferred taxing point occurs. This happens when the shares or rights can be sold freely, when the employee leaves their job (for exits before 1 July 2022), or after 15 years (7 years for ESS interests acquired before 1 July 2015). For rights, tax may also be triggered when they are exercised, and the shares can be sold without restrictions.