Since July 2015, the Australian Government has been allowing concessions to eligible companies in an effort to improve the competitiveness of Australia’s tax treatment of employee share schemes. This article summarises the start-up concession and its eligibility criteria.
What is the ESS start-up concession?
The ESS start-up concession is designed to reduce the amount of tax that an eligible participant would have to pay.
Under the ESS start-up concession, an eligible employee can reduce the taxable discount income relating to their ESS interests to nil. This effectively means that the employee would not have to pay any tax on their ESS interest until the interest is sold. This is a significant shift from the normal position regarding the tax treatment of employee share schemes.
When the ESS interest is sold, the CGT rules will apply. A 50% CGT discount may be available if the sale occurs at least 12 months after they were granted to the participant.
Note that this concession is only available to ESS interests acquired after 30 June 2015.
What are the eligibility criteria for the ESS start-up concession?
The following criteria must be satisfied to qualify for the start-up concession:
Eligibility Criteria for the Company
|1. Aggregated turnover||
The company granting the ESS interest must have an aggregated turnover of less than $50 million in the income year before the year the interest is granted.
This test includes turnover generated by connected entities. (An entity is connected with another entity if either entity controls the other entity or both entities are controlled by the same third entity.)
|2. Unlisted entity||
The company (and its corporate group) can’t be listed on a stock exchange in the year before the ESS interest is offered.
|3. Company age||
The company (and its connected entities) must have been incorporated for less than 10 years at the end of the most recent income year.
|4. Company's main business||
The main business of the company must not be the acquisition, sale or holding of shares, securities or other investments.
The employing company must be an Australian resident taxpayer.
|Eligibility Criteria for the Scheme|
|6. Share class||
The ESS interests must be ‘ordinary’ shares or options or rights to acquire ordinary shares.
|7. Minimum holding period||
The ESS interests must be held for at least three years (starting on the date the ESS interests were acquired) or until the employee ceases employment (whichever happens earlier).
|8. Exercise price||
Where the ESS interests are options or rights, the exercise price must not be less than the market value of the shares in the company at the date of grant of the options.
Note that start ups may be able to take advantage of the ‘net tangible asset’ method of valuation. As start ups typically have very few assets, this method may produce a low company valuation resulting in a nominal exercise price.
|9. Share price||
Where the ESS interests 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.
|10. Broad availability||
Where the ESS interests are shares and the company is more than 3 years old at the time the shares were acquired, at least 75% of the Australian resident permanent employees of the company who have completed at least 3 years of services are or at some time had been entitled to acquire ESS interests under the scheme or ESS interests in the employer/holding company under another scheme. If the company is less than 3 years old, this condition may be satisfied even though the employer does not have any employees who qualify for the 3 year minimum requirement.
|Eligibility Criteria for the Participants|
Participants must be employed by the company or a subsidiary in which the interest is granted.
|12. Maximum shareholding or voting rights||
Participants cannot hold more than 10% maximum shareholding or voting rights in the company in which the ESS interests are being granted. This includes vested and unvested options having and aggregated both the current and previous grants. The 10% will be calculated having regard to the beneficial ownership of the ESS interests. (For example, shares owned by a participant's family trust may be taken into account in addition to any ESS interests held by the participant personally.)
You can read more about how employee share schemes and ESOPs work here.