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18 January 2023

Eligibility criteria for the ESS start-up concession

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:

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. 

5. Residency

The employing company must be an Australian resident taxpayer. 

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. 

For the Participants
 
11. Employees

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.)

ESOP guide

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About Turtons

Turtons is a commercial law firm in Sydney with specialist expertise in the construction and technology sectors.

We specialise in helping businesses:

  • improve their everyday contracting processes,
  • negotiate large commercial contracts and other deals that fall outside of "business as usual", and
  • undertake strategic initiatives, such as raising capital, buying businesses, implementing employee share schemes, designing and implementing exit strategies and selling businesses.
Bridgit Masson | Senior Associate

Author

Bridgit Masson | Senior Associate

bridgit.masson@turtons.com

Bridgit is a commercial lawyer who helps privately owned companies and investors execute business-changing transactions, including capital raising, business acquisitions, employee share schemes and business sales. She also assists companies streamline their everyday transactions through the development of standardised contracts and related documents, as well as advising on commercial transactions that fall outside of ‘business as usual’.


bridgit.masson@turtons.com | (02) 9229 2903

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