Employee Share Ownership Plans - Tax Incentives for startups

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Looking to incentivise your employees through equity in the biz?  You should consider putting an employee share ownership plan (or “ESOP”) in place. If you do, then make sure you access the ATO’s tax concessions for startups, if you’re eligible!

What is it?

ESOPs enable business owners to incentivise their employees by issuing them with shares or options to acquire shares in the business. Normally, an employee who receives shares or options would need to pay tax on them in the same financial year, but these concessions allow employees to defer that tax until they sell the shares (up to 15 years).

Incentive:

Employees of start-up companies paid with options and shares will not be taxed for them until they realise a benefit (i.e. by selling their shares). Eligible start-up companies will also be able to offer shares and options to their employees and have tax deferred until sale.

Who is eligible?

To be eligible for the ESOP tax concessions, there are a number of criteria that need to be satisfied. As a starting point, a company should ask itself:

• In the last income year, did the aggregated income of the Company and all corporate group entities exceed $50 million?

• Is the Company or any entity in the corporate group listed on an approved stock exchange?

• Was the Company and all entities in the corporate group incorporated less than 10 years ago?

• Is the employing company (which can be different from the company granting the ESOP interests) an Australian resident for tax purposes?

• Are each of the intended recipients under the ESOP either an employee or independent contractor of the Company? 

• Will the shares for the employee or independent contractor be issued at the market value?

• Will those being issued shares under the ESOP be required to hold onto their shares for at least 3 years (unless their engagement terminated early or they leave the company)?

Will any intended recipient under the ESOP hold 10% or more of the total shares or voting rights in the Company (either before or after an ESOP grant is made)?

Timing:

Anytime.