Employee share schemes in Australia: the rules since 2022, explained

People mix these up constantly, so keep them apart. The Corporations Act answers: can the company offer these shares or options to staff without a prospectus, and how? That is Division 1A of Part 7.12, which replaced ASIC's old class order relief on 1 October 2022. The tax law answers: when does the employee pay tax on the value they are getting, and how much? That is Division 83A of the Income Tax Assessment Act 1997. A scheme has to work under both.

An offer of shares or options to employees is an offer of securities, so without relief it would need a disclosure document, which a private company cannot give. Division 1A is the relief. An ESS offer that meets it is outside the prospectus rules (s1100ZC(2)) and, with one narrow exception, is disregarded when counting the 20 investors and $2 million small-scale limits (s1100ZC(4)). The scheme can cover employees, directors, contractors who provide services to the company, prospective hires, and close relatives or entities investing on their behalf (s1100L).

The offer has to say it is made under Division 1A (s1100N), and it has to fit one of two shapes.

• No money changes hands (s1100P). Nothing is paid on grant and nothing is paid on exercise. Free shares, or options with a nil exercise price, are the examples. These offers need only the issue cap below.
• Money changes hands (s1100Q). If the employee pays anything, on grant or on exercise, the offer is a monetary consideration offer. An option with a $0.01 exercise price is in this bucket. For an unlisted company that brings four extra requirements: an ESS offer document with the terms, general risk information and a statement that the interests may have no value (s1100W); the latest financial information with a note on whether it was audited, a valuation of the shares, and a statement that the company is solvent (s1100X); a 14-day wait after the person receives those documents before they can acquire the interest, with the financials, valuation and solvency statement refreshed before an option is exercised (s1100Y); and the monetary cap.

The issue cap applies to every ESS offer. For an unlisted company, the interests offered under the scheme, plus everything issued under ESS offers in the three years before, cannot exceed 20 per cent of the shares on issue (s1100V). Listed companies get 5 per cent. Most start-up option pools sit at 10 to 15 per cent, so this is rarely the binding constraint.

The monetary cap applies only where money changes hands. Each participant can be asked to pay no more than $30,000 in any 12-month period under the scheme (s1100ZA), counting the exercise price of options as money to be paid (s1100ZA(4)). Unused room from the previous four years carries forward for option exercise money, so a participant who paid nothing for four years can exercise up to $150,000 of options in the fifth. There are two important exclusions (s1100ZB): exercise money that under the offer's terms can only fall due in a liquidity period, meaning a listing or a signed sale of the company, and contributions to an approved contribution plan. Most start-up option plans are drafted so exercise happens at exit, which is what keeps the cap from biting.

The default rule is blunt. The discount, meaning the market value of the share or option when the employee acquires it minus what they paid, is included in their assessable income for the year they acquire it (s83A-25). They are taxed on paper value they cannot sell, which is the problem every other rule below exists to solve. Employees earning $180,000 or less can reduce the taxed amount by up to $1,000 if the scheme meets some conditions (s83A-35).

A deferral scheme moves the taxing point. If the interest is at real risk of being forfeited, or the scheme genuinely stops the employee selling it, tax is deferred until the earliest of: the risk and restriction falling away; for options, the option being exercised and the resulting share being free of risk and restriction; and fifteen years from acquisition (s83A-105, s83A-115, s83A-120). Since 2022 leaving the company is no longer a taxing point on its own. At the deferred point the employee is taxed on the value then, as income.

This is the rule most private companies aim for. If it applies, the discount is not taxed as income at all. The employee is treated as having bought the interest at market value, and the only tax is capital gains tax when they eventually sell the shares, with the discount available if they have held for 12 months. The conditions in s83A-33 and s83A-45 are:

• Unlisted. Neither the company nor any subsidiary or holding company has shares quoted on a stock exchange at the end of the previous income year.
• Under 10 years old. The company and every company in that group was incorporated less than ten years before the end of the previous income year.
• Turnover under $50 million. The company's aggregated turnover in the previous income year was $50 million or less.
• An Australian employer. The employing company is an Australian resident.
• Priced right. For options, the exercise price is at least the market value of an ordinary share on the day the option is granted. For shares, the discount is no more than 15 per cent of market value. This is why valuations matter so much for start-up option plans.
• Held for three years. The scheme must stop the employee disposing of the interest, or the shares it becomes, for three years, unless they leave the company or the whole company is sold earlier (s83A-45(4) and (5)).
• Under 10 per cent. Immediately after the grant, the employee holds no more than 10 per cent of the shares and controls no more than 10 per cent of the votes, counting shares under unexercised options (s83A-45(6) and (7)).
• Ordinary shares only, and for shares (not options) the scheme must be offered to at least 75 per cent of permanent employees with three years' service (s83A-45(2), s83A-105(2)).

Both rule sets need a market value: the Corporations Act for the valuation that goes to participants, and the tax law for the start-up pricing test. The ATO approves safe-harbour methods. The current instrument is the Income Tax Assessment (Methods for Valuing Unlisted Shares for the Employee Share Scheme start-up concession) Legislative Instrument 2025, in force from 1 October 2025, which replaced the 2015 approval. It allows a valuation prepared by the CFO or a suitable valuer on a reasonable basis and endorsed by the directors in a written resolution, or, for a company that has raised no more than $10 million in the last 12 months and is either under seven years old or a small business entity, a net tangible assets method: net tangible assets, less what the preference shares would take, divided by the shares. Both require that the directors do not expect a change of control within six months. A valuation prepared under an approved method also satisfies the Corporations Act's valuation requirement (s1100X(3)).

A company with an employee share scheme reports twice a year, whatever kind of scheme it is. By 14 July after the end of the income year it gives each participant an ESS statement. By 14 August it lodges an ESS annual report with the ATO, electronically. Start-up schemes are not exempt: the statement still has to show what was acquired, its market value, the acquisition price, any exercise price and the date. An error found later is corrected within 30 days.

The ESOP screen records the option pool, each grant and its vesting tranches, and can import a grant letter rather than have you retype it. The pool counts in fully diluted ownership before anything is exercised, which keeps the round model and the cap table honest. The company records the plan's type and its own answers against the start-up concession conditions, and the accountant report at year end sets out what was granted, vested and exercised for the ESS statements. Struck never values a share and never works out anyone's tax. The guide on recording option grants walks through it.