An employee share scheme is any arrangement providing shares, options or rights to an employee at a discount. Australia taxes it one of two ways, upfront or deferred, and an eligible start-up can reduce the taxable discount to nil under the ATO’s start-up concession.
The umbrella term for every grant on this page
ESS is the legal and tax category, not a specific product. An ESOP, a direct grant of founder shares, a stock option plan, and even dividend access shares issued to an employee can all be ESS interests under the ATO’s ESS rules. What changes between them is the plan design, not the underlying framework.
The three tax paths, and why most startups want the third
Whether an ESS interest is taxed when it lands or years later comes down to which of three paths the plan is built on.
A taxed-upfront scheme bills the recipient in the year they acquire the interest, on the gap between market value and what they paid, regardless of whether the company is liquid enough for them to sell anything to cover it. A tax-deferred scheme pushes that bill out to the earliest of a few trigger events: the interests stop being at real risk of forfeiture and the scheme no longer restricts disposal, or 15 years pass, whichever comes first (since 1 July 2022 leaving the company is no longer, on its own, a trigger). The bill still lands eventually, and the ATO applies a 30-day rule so a disposal shortly after the trigger resets the taxing point to the sale date.
The third path is why most eligible startups structure toward it. Under the ATO’s start-up concession, a company that is unlisted, incorporated for less than ten years and has aggregated turnover under $50 million can grant ESS interests where the employee’s taxable discount is reduced to nil, provided the discount on shares is no more than 15% of market value (or, for options, the exercise price is at least market value) and the interests are held for a minimum of three years, or until the employee leaves if earlier. Tax only shows up later as capital gains tax on eventual sale, which is a materially better outcome for a candidate weighing an offer today.
I go through how this plays out for a standard ESOP pool in more detail.
It rarely arrives as the only kind of equity on the table
It is genuinely rare, in the roles I place, for a first finance hire or a first CFO to take the role with no equity upside at all. Founders want the person bought into where the business is going, not just paid to show up.[1] But equity does not cover a mortgage, and a candidate with real financial responsibilities at home is entitled to weigh a lower-equity, higher-cash offer against a higher-equity, lower-cash one on its merits.[2] One package I saw structured this well let the candidate choose their own split, more base with less ESOP, or less base with more, rather than the company dictating the mix.[3]
Common questions
What is the difference between an ESS and an ESOP?
ESS (employee share scheme) is the ATO's umbrella term for any arrangement where an employer gives an employee shares, options or rights at a discount. An ESOP is one specific form of it, an option pool set aside for employees. Every ESOP is an ESS; not every ESS is an ESOP.
Is an employee share scheme taxed when the shares are granted?
It depends on the plan. Under a taxed-upfront scheme, yes, in the year of acquisition. Under a tax-deferred scheme, tax is pushed to a later trigger event, up to 15 years out. Under the ATO's start-up concession, an eligible company can reduce the taxable discount to nil, so tax only arrives as capital gains tax on eventual sale.
Which companies qualify for the ESS start-up concession?
Unlisted Australian resident companies incorporated for less than 10 years, with aggregated turnover under $50 million in the prior income year, where the discount on shares granted is 15% or less of market value and interests are held at least 3 years or until the employee leaves.
Does every finance hire get equity in an Australian startup?
Not always, but it is unusual in the roles I place for a first finance hire or a first CFO to join with no equity upside. Founders generally want the person invested in the outcome, not just paid a salary.
References
- From my placements: it is rare for a first finance hire or a first CFO to take the role without some equity upside; founders want the person bought into the outcome.
- From candidate conversations I have run: equity does not cover a mortgage or school fees, and candidates with real financial commitments are right to weigh cash and equity on their own merits rather than defaulting to whichever split the company prefers.
- From a package I saw structured well: the candidate chose their own base-versus-ESOP split rather than the company setting it, which left them owning the trade-off rather than resenting it.
These guides set out how we see it, drawn from the searches we run and the finance leaders we place. They are general information about the market, not financial, accounting or legal advice, and they are no substitute for advice on your own circumstances.