Employee Share Schemes in Australia: How They Work and How They're Taxed

🎁 What an employee share scheme actually is🔗

An employee share scheme is an arrangement where your employer gives you shares in the company, or the right to acquire them, as part of your pay. Sometimes you buy them at a discount. Sometimes you get them for nothing. Either way the ATO treats the benefit as income, and it has specific rules about exactly when you declare it.

Companies do this for a few reasons. It ties your outcome to the company's performance, it helps keep people without raising salaries, and for a start-up short on cash it can buy talent it could not otherwise afford.

🧩 Shares, RSUs, options and phantom equity🔗

Not all equity offers are the same thing, and the word people use in the offer letter is not always the word the tax rules use.

• Shares. You own real equity from day one. Dividends come to you, and a rising price makes your holding worth more. It can fall too, and in a private company there may be no way to sell.
• RSUs, or restricted stock units. A promise of shares, delivered when conditions are met. You own nothing until they vest.
• Options. The right to buy shares at a fixed exercise price. You have to pay that price to get the shares, and if the market price never passes it, the option expires worth nothing.
• Phantom equity. A cash payment that tracks the share price. No ownership, no shares, just a contractual entitlement.

⏱️ The concept that decides everything🔗

Under Division 83A the central question is not just how much tax you pay. It is when you pay it. There are two regimes, and which one applies changes the size of the bill, the year it lands, and when your capital gains clock starts.

Both turn on one word: the discount. That is simply the market value of the interest minus whatever you paid for it. Free shares worth $5,000 give you a $5,000 discount. Shares worth $3,500 that cost you $2,500 give you a discount of $1,000.

Under upfront taxation the discount goes into your assessable income in the year you acquire the interest. Under deferred taxation it is pushed to a later deferred taxing point, and you are taxed on the value at that later moment instead.

💵 Upfront taxed schemes and the $1,000 reduction🔗

Under an upfront scheme the discount is added to your assessable income in the year you acquire the interest, and taxed at your marginal rate like salary. Our guide to the tax brackets covers what that rate actually is.

There is a concession that can take up to $1,000 of the discount out of your income. According to the ATO, it applies where all of the following hold:

• Your taxable income after adjustments is $180,000 or less
• The scheme is offered on a non-discriminatory basis to at least 75% of Australian-resident permanent employees with at least three years of service
• You do not have a real risk of forfeiting the interest
• The scheme is operated so you hold the interests for a minimum of three years, or until your employment ends

🎯 The essential: Two worked examples. Shares worth $3,500 that cost you $2,500 give a $1,000 discount, and if the reduction applies there is nothing to declare. A $4,000 discount with the reduction applied leaves $3,000 of assessable income.

On a modest grant the reduction can erase the bill entirely. On a large one it barely registers, which is exactly why the rest of this article matters.

⏳ Tax-deferred schemes and what triggers the DTP🔗

Under a deferred scheme you pay nothing at acquisition. Tax waits for the deferred taxing point. Deferral is available where the interest carries a real risk of forfeiture, or a genuine restriction on selling, or the scheme qualifies for the start-up concession.

For a share, the ATO says the deferred taxing point is the earliest of two events: when there is no real risk of forfeiture and the scheme no longer genuinely restricts disposal, or 15 years after you acquired it. For a right, exercising it also counts, for interests acquired after 30 June 2015.

At the deferred taxing point the discount, measured as market value at that moment less your cost base, goes into your assessable income as ordinary income.

The start-up concession. Eligible start-ups can offer interests under a more generous regime where tax can wait until you sell and the gain is taxed as a capital gain rather than income. The company must be an Australian resident taxpayer, the discount on a share is capped at 15% of market value, and for a right the exercise price must be at least the market value of an ordinary share at grant. On top of that, the ATO requires the company to be unlisted, incorporated less than 10 years before the end of its most recent income year, and to have an aggregated turnover under $50 million for that year. Aggregated turnover includes affiliates, so a small company with a larger affiliate can fail the test even when its own revenue looks modest.

📈 What happens when you finally sell🔗

Selling is a second, separate tax event. Capital gains tax applies to any gain above your cost base, and the cost base depends on which regime taxed you earlier.

• Upfront taxed shares. Your cost base is the market value at acquisition, because you already paid income tax on the discount then.
• Deferred taxed shares. The ATO treats the interest as re-acquired immediately after the deferred taxing point. That resets both the cost base and the acquisition date.

🎯 The essential: That reset matters more than it sounds. For a deferred scheme, the twelve months you need for the 50% CGT discount runs from the deferred taxing point, not from the day you were granted the equity.

If the price falls after the taxing point and you sell at a loss, you have a capital loss. It can offset capital gains this year or in future years, but never your salary. Our guide to capital gains tax on shares covers the mechanics, and the CGT calculator will run your own numbers.

🧾 What your employer owes you, and what you must report🔗

Your employer must give you an ESS statement by 14 July after the end of the financial year, and an administrative penalty applies to those who do not. The statement shows the discount for each type of scheme, and whether a taxing point happened during the year.

You declare the discount in the year the taxing point occurs. Not the year of the offer, not the year you sell. The ATO pre-fills some of this into myTax, but pre-fill is not always complete on deferred schemes. Check it against your statement before you lodge, using our step-by-step lodgement guide if you need it.

❓ Questions to ask before you accept🔗

• Is this upfront or deferred? It decides when the bill arrives.
• What is the vesting schedule, and what happens to unvested interests if I leave? Most plans forfeit them.
• For options, what is the exercise price against today's market value? Options granted at or above market value only pay off if the price rises.
• Is there actually a market for these shares? Private company shares can be impossible to exit for years.
• How is market value determined for a private company? Someone has to produce that number for tax purposes. Ask how.

Equity can be a genuinely valuable part of a package. But the rules are specific enough, and the amounts often large enough, that a registered tax agent is worth the fee for any meaningful grant. It is usually trivial next to the tax you could overpay, or underpay and then owe with interest.

❓ Frequently asked questions🔗