Employee Stock Options in Australia: How They Work and What They Are Worth
Offered options instead of shares? What the exercise price means, why vesting and exercising are different, and the cash trap in an unlisted company.
By Timothy Hirou GaschereauPublished 10 min read
🎟️ What an option is, and the exercise price
An option is not a share. It is the right to buy one later, at a price fixed today. That fixed price is the exercise price, sometimes called the strike. It is set when the options are granted and it never moves, whatever the shares do afterwards.
That single feature is the whole instrument. If the share price climbs well above your exercise price, you buy cheap and the difference is yours. If it never gets there, you simply do not exercise, and the option quietly expires. Our guide to employee share schemes covers where options sit among the other instruments.
| Stock options | RSUs | |
|---|---|---|
| What you receive | A right to buy at a fixed price | A promise of shares once conditions are met |
| What you pay | The exercise price, when you exercise | Nothing, the shares are free |
| When tax applies | At the deferred taxing point, often exercise | Usually at vesting, when shares are delivered |
| If the price falls | They can become worth nothing at all | Still worth something while the price is above zero |
| Main risk | Ending up with options worth nothing | A tax bill at vesting even if you cannot sell |
🔀 Vesting and exercising are different
People use these interchangeably and it causes real confusion. They are two separate events, often years apart.
- Vesting is when the option becomes yours to use. You have earned it. Nothing has been bought and no money has changed hands.
- Exercising is when you actually pay the exercise price and take the shares. This is an active decision you make, and it costs real cash.
🎯 The essential: RSUs vest and land in your account automatically. Options vest and then sit there, waiting for you to do something. Nobody exercises them on your behalf.
📊 In, at, and out of the money
Three terms describe where the share price sits relative to your exercise price, and they decide whether the option is worth anything.
- In the money. Share price above the exercise price. Exercising gives you an immediate paper gain.
- At the money. Share price equals the exercise price. No intrinsic value yet, only the hope of growth.
- Out of the money. Share price below the exercise price. Exercising would mean paying more than the shares are worth.
Most employee options are granted at the money, which is worth sitting with for a moment. On day one they have no intrinsic value at all. Every dollar you eventually make depends on growth that has not happened yet.
⏱️ When the tax hits for options
Options are rights, and rights have their own set of triggers, which differ from those for shares. For a right, the deferred taxing point is the earliest of three things.
- When there is no real risk of forfeiting the right and the scheme no longer genuinely restricts disposing of it
- For interests acquired after 30 June 2015, when you exercise, provided the resulting share is then free of forfeiture risk and disposal restrictions
- 15 years after acquisition, or 7 years for interests acquired before 1 July 2015
That middle trigger is the one that catches people. Exercising is not a neutral administrative step. It can be the event that creates an income tax bill, calculated on the gap between market value and what you paid, before you have sold a thing.
After the taxing point, the interest is treated as re-acquired, which resets your cost base and your acquisition date. So the twelve months you need for the 50% CGT discount starts then, not at grant. Our guide to the taxing point works through this in detail, and since 1 July 2022 leaving your job is no longer a trigger at all.
💰 The exercise decision, and the cash it needs
Exercising costs money twice. First the exercise price itself, paid from your own pocket. Then, potentially, income tax on the gain, in the same financial year.
Some plans offer a cashless or same-day-sale exercise, where enough shares are sold immediately to cover both costs. Whether that is available, and exactly how it is treated, is set by your plan rules, so check before assuming it. Run the numbers through the income tax calculator with the expected gain added to your salary before you commit.
🏢 Listed versus private company options
If the company is listed, exercising is mostly a maths problem. There is a live price, a market to sell into, and you can raise cash the same day.
🎯 The essential: In an unlisted company the picture changes completely. You pay the exercise price in cash, you may owe income tax on a valuation nobody will pay you, and there is no buyer. Two real outflows, no inflow, for shares you cannot move.
The start-up concession exists partly for this reason. Where the company qualifies, being unlisted, an Australian resident taxpayer, incorporated less than 10 years before the end of its most recent income year, with aggregated turnover under $50 million, tax can be deferred to sale and treated as a capital gain. For a right, the exercise price must be at least the market value of an ordinary share when the interest was provided. Whether your employer qualifies is a question for them and a registered tax agent, not an assumption.
Valuing an unlisted company's shares is its own problem. The ATO publishes valuation guidance, and the method your employer uses directly determines the size of your bill, so it is a fair question to ask.
🚪 What happens when you leave
Unvested options almost always lapse on departure. Vested options usually come with a short exercise window, commonly 30 to 90 days, after which they lapse too. Some plans have good leaver provisions that extend it.
That window is where the pressure sits. You may have weeks to find the exercise price in cash for shares you cannot sell, on a company you no longer work for. It is worth knowing the terms long before you resign, not during your notice period. The exact rules are in your plan documents and vary widely between employers.
SnowLetter
Australia's money news and our best reads, once a week.
❓ Frequently asked questions
What happens if my options expire worthless?
+
If they lapse without being exercised, there is generally no income tax, because no taxing point ever arrived. If you paid something for the options themselves, which is rare, that amount may be a capital loss. Confirm the treatment with a registered tax agent, especially if tax was already paid at an earlier point in the scheme.
I am at a private company and cannot sell after exercising. What do I do?
+
This is the hardest situation in options. If exercising triggers the taxing point, you can owe income tax on a gain while holding shares nobody will buy. Before exercising, get the current valuation, model the likely bill, and find out whether any liquidity event is realistic. The start-up concession can defer tax to the eventual sale, but only if your employer qualifies.
Do I pay tax when my options vest?
+
Usually not. For most Australian tax-deferred plans, vesting alone is not the taxing point. For interests acquired after 30 June 2015 it is often exercise, provided the resulting share is then free of forfeiture risk and disposal restrictions. Your plan documents and ESS statement will tell you which applies.
Can I keep options after I leave the company?
+
It depends entirely on your plan. Most give a short window, commonly 30 to 90 days, to exercise vested options after employment ends, and unexercised options then lapse. Some plans have good leaver provisions that extend it. Read the documents, and note that since 1 July 2022 leaving your job does not itself trigger the deferred taxing point.
What is the difference between the exercise price and the market value at exercise?
+
The exercise price is fixed when the options are granted and never changes. The market value at exercise is the actual share price on the day you exercise. The gap between them is your gain, and under a deferred scheme that gain, reduced by your cost base, is what becomes assessable income at the taxing point.
Are stock options, share options and ESOPs the same thing?
+
Broadly yes. Employee stock options, share options and ESOP all describe a right to acquire shares at a fixed price. The ATO uses the word right in the legislation. The tax rules do not change based on what your employer calls the plan.
📚 Recommended reading
The Psychology of Money
Morgan Housel
The Psychology of Money
19 short stories on how people actually think and feel about money, not just the maths of it.
The Simple Path to Wealth
JL Collins
The Simple Path to Wealth
The friendliest on-ramp to index investing there is, born from letters a dad wrote his daughter. It makes 'buy the whole market and chill' feel obvious, just map his US fund picks onto Aussie equivalents and super.
The Barefoot Investor
Scott Pape
The Barefoot Investor
Australia's best-selling money book ever. A simple system for accounts, budgeting, debt and a real emergency fund in one.
Some links above are affiliate links. If you buy through them, Snowball Invest may earn a small commission at no extra cost to you. We only recommend books we'd suggest anyway.
Where to next
Sources
- 1. Employee share schemes, Australian Taxation Office
- 2. Tax-deferred schemes and the deferred taxing point, Australian Taxation Office
- 3. Start-up concession, interests acquired after 30 June 2015, Australian Taxation Office
- 4. ESS and capital gains tax, Australian Taxation Office
- 5. Genuine disposal restrictions and deferred taxing points, Australian Taxation Office
- 6. ESS reporting requirements for employers, Australian Taxation Office
- 7. Employee share schemes, Moneysmart (ASIC)
This article contains general information only and does not constitute personal financial or tax advice. Option plans vary enormously in their terms, and the treatment of exercise, departure and valuation depends on your specific plan documents. Speak with a registered tax agent before exercising.
Was this article useful?
Put it to your own numbers
Every calculator runs entirely in your browser, with nothing stored. See what these numbers look like for your own situation.
Explore the calculators →General information only. This article is educational and does not constitute personal financial advice. It does not account for your circumstances. Consider your own situation and seek advice from a licensed adviser before acting. Read our full disclaimer.
Timothy Hirou Gaschereau
Founder of Snowball Invest, not a financial adviser.
I write about what I'm learning myself, because nobody ever taught us how to take control of our own money. It's a skill, not a mystery, and it's never too late to learn it. The best day to start was yesterday, the second best is today.
LinkedIn →Related articles
Employee Share Schemes in Australia: How They Work and How They're Taxed
Offered shares, RSUs or options at work? How employee share schemes are taxed in Australia, when the tax actually hits, and what to ask before you accept.
RSU Tax in Australia: When You Actually Pay, and How Much
Your RSUs are about to vest. When the tax hits, what gets assessed, why there may be no withholding at all, and the CGT clock most people get wrong.
The ESS Taxing Point: Upfront or Deferred, and Why It Decides Everything
Your ESS tax bill hangs on one date. How to tell which regime your plan uses, what triggers the deferred taxing point, and what changed on 1 July 2022.