Under the startup concession an eligible company can grant shares or options with no income tax at grant, at vesting or at exercise. The gain is taxed as a capital gain when the shares are sold, usually with the 50 per cent discount.
An employee share scheme is one of the few ways a young company can compete for experienced people without the cash to match a bigger salary. Prime Innovation, a specialist division of Prime Partners, designs and documents schemes that qualify for the concession, sets defensible valuations, and handles the annual reporting, for a fixed fee.
The ESS startup concession sits in Division 83A of the Income Tax Assessment Act 1997 and has been available since 1 July 2015. Where a company qualifies, the discount on an employee share scheme interest is exempt from income tax entirely. Any gain is dealt with under the capital gains rules on sale. The company has to be unlisted, incorporated for less than ten years and turning over under $50 million, and options have to be priced at or above market value.
Under the ordinary employee share scheme rules, when someone receives shares or options at a discount to market value, that discount is taxed as ordinary income. Sometimes up front, sometimes at a deferred point. Either way it can leave a person owing tax on equity they cannot sell, and in a company that might not be worth anything in the end.
The startup concession changes that. For an eligible company and an eligible person, the discount is exempt from income tax under the ESS rules altogether. What is left is a capital gain, worked out and taxed when the shares are actually sold.
Nothing is assessable when the options or shares are received, so there is no bill for equity that has not turned into anything yet.
The ESS taxing points do not apply, so nothing falls due when the interest vests or when an option is exercised.
The gain is taxed as a capital gain rather than as employment income, which is the whole point of the concession.
Where the shares have been held twelve months or more, the general CGT discount halves the taxable gain.
| Condition | What it means |
|---|---|
| Age | Incorporated for less than ten years before the start of the income year in which the interest is acquired. |
| Not listed | Not listed on an approved stock exchange when the interest is issued. |
| Turnover | Aggregated turnover under $50 million in the income year before the interest is acquired. |
| Residence | An Australian resident company for tax purposes. |
Age and listing status are tested across every company in the group, not only the one doing the employing. A ten year old dormant holding company is enough to put the whole group outside the concession, which is worth checking before anything is issued.
| Condition | What it means |
|---|---|
| The 10 per cent limit | Together with their associates, the holder cannot hold more than 10 per cent of the shares or control more than 10 per cent of the votes. |
| Minimum holding | The scheme has to require the interest to be held for at least three years, or until employment ends if that comes first. |
| Arm's length terms | The scheme has to be offered on arm's length terms. |
| Genuine employment | The holder has to be an employee of the company or a subsidiary, or a person the deeming rule reaches, which is covered further down. |
The exercise price has to be equal to or greater than the market value of an ordinary share at the time the option is issued. Price it below market value and the concession is gone.
The discount cannot be more than 15 per cent of the market value of the share when it is issued.
Compare that with standard deferral, where the discount is taxed as ordinary income at the person's marginal rate, at the earliest of vesting, exercise, the restrictions coming off, or fifteen years after acquisition. The top marginal rate is 47 per cent. The effective rate on a discounted capital gain is 23.5 per cent.
A startup grants an employee 10,000 options at an exercise price of $1.00 a share, which is market value at grant. Three years later the employee exercises when the shares are worth $5.00. Two years after that they sell at $8.00.
| Event | Standard ESS, deferred | Startup concession |
|---|---|---|
| Grant | No tax, deferred | No tax |
| Exercise | $40,000 taxed as income | No tax |
| Sale | $30,000 capital gain | $70,000 capital gain |
| After the 50% CGT discount | $15,000 | $35,000 |
| Taxable in the end | $40,000 income plus $15,000 gain | $35,000 gain only |
Under the concession the whole gain is a capital gain, so the discount applies to all of it rather than only to the part that accrued after exercise. The effective rate lands at roughly half.
The biggest barrier to people accepting equity is owing tax on shares that may never be worth anything. The concession removes it.
You can offer a real incentive without lifting salary costs, which matters most in the years before there is revenue to pay from.
The whole gain is taxed as a capital gain. Against a top marginal rate of 47 per cent, the effective rate after the discount is 23.5.
The ATO publishes template documents for schemes using the concession, which takes real cost out of establishing one.
Tax falls due only when shares are sold, so nobody has a reason to sell early just to fund a tax bill.
An experienced operator knows what tax advantaged equity is worth. A well built scheme is a genuine advantage when you are hiring.
The usual choice. The right to buy shares at a set price later, priced at or above market value at grant, with no tax at grant or exercise and capital gains treatment on sale. Typically four year vesting with a one year cliff.
The same idea with a nil exercise price, so shares come free on vesting. For the concession to apply the market value at grant has to be nil, which is rare, so these usually run under the standard deferred rules instead.
Shares at a discount of up to 15 per cent of market value. The employee pays for them up front at the discounted price, which is less useful for cash flow than an option.
Valuation at grant, a vesting schedule that still clears the three year minimum, good leaver and bad leaver terms, and a pool that usually sits at 10 to 15 per cent of fully diluted capital.
Valuation is the part that most often goes wrong. Market value at grant has to be set by an ATO approved method: net asset backing, an earnings based valuation, an independent valuer, or the price from a recent arm's length transaction. The safe harbour methods sit in a legislative instrument remade with effect from 1 October 2025, which replaced the 2015 one.
This is the question founders ask most often. The startup concession sits in Division 83A, and section 83A-325 extends that Division to individuals who provide services to a company under an arrangement, rather than only to people on the payroll. Under that provision the law treats the service arrangement as though it were employment, so a genuine contractor, consultant or non-employee adviser can be eligible on the same terms as an employee.
That tax side extension has applied since the concession began on 1 July 2015. It is a separate thing from the 2022 Corporations Act reforms, in force from 1 October 2022, which widened the regulatory and disclosure relief for share scheme offers to cover everyone who provides services to a business. The two work together: the Corporations Act makes the offer easier to administer, and section 83A-325 lets the recipient reach the tax concession.
Section 83A-325 reaches a person who actually provides services under an arrangement. An outside investor who provides no services does not qualify by this route.
Unlisted, incorporated less than ten years, aggregated turnover $50 million or less, all assessed across the group.
Options at or above market value, shares discounted by no more than 15 per cent.
Held for at least three years or until the arrangement ends, and no more than 10 per cent of the shares or votes immediately afterwards.
The interaction between the deeming rule in section 83A-325 and the employment condition in section 83A-45 is technical, and the answer for a particular contractor or adviser depends on the facts of their arrangement. Confirm a specific person's position before any interests are issued. This is general information rather than advice on your circumstances.
ESS statements go to everyone participating, so they have what they need for their own tax return.
The ESS annual report, setting out every interest granted, exercised or disposed of during the year.
Scheme documents and board resolutions, the valuation reports used to set exercise prices, grant letters and acceptances, vesting and exercise records, and the annual reports as lodged. If the treatment of a grant is ever questioned, these are what answer it.
A look at the company structure, the incorporation history, turnover and the corporate group, to confirm the concession is actually available before anything is issued.
Working alongside your lawyers on a scheme that complies and also does what you want it to do commercially.
Preparing or reviewing the valuation that sets the exercise price, using a method the ATO accepts.
What the tax looks like for the company and for each person under different exit scenarios, before anyone signs anything.
The annual report to the ATO, the statements to your people, and keeping the scheme inside Division 83A year to year.
Most companies using this concession are also claiming the R&D Tax Incentive. The two are coordinated, including how employee costs are allocated to R&D activity.
Most of what goes wrong with an employee share scheme is settled at the start, in the group structure, the valuation and the scheme terms. Those are much harder to fix once interests are on issue.
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