Reading time: 4 minutes

Having loyal, dynamic employees increases the value of your business. They are an asset to your company. How can you keep these star employees happy by rewarding their outstanding efforts? One option is to take advantage of the beneficial tax treatment of an Employee Share Option Plan (or ESOPs or an Employee Share Scheme – ESS).

For a startup company, the office culture and social dynamics can be critical to ensuring its success, as the workforce of a startup is usually much smaller due to restraints on cost and with overheads being so high. Similarly, startups may not be able to offer employees lucrative salaries and so founders may need to provide additional incentives to retain employees.

An Employee Share Option Plan (ESOP) is a scheme that provides a company’s employees with the ability to own shares in the business. Below, we set out the benefits of an ESOP as well as recent changes to their tax treatment in Australia.

What are the Benefits of an Employee Share Option Plan?

These schemes are attractive to startup founders and employees for a number of reasons, including:

  • Reducing upfront hire costs as employers usually offer ESOPs as part of an employee salary package;
  • Often, people work harder when they own a part of a company, increasing productivity and their quality of work;
  • Employees will typically stay with a company longer if they have an ownership stake, allowing the company to retain talent; and
  • Sharing ideas and risks with others who have expertise in the market or industry the business operates in.

Terminology Used in an Employee Share Option Plan

An employee receives an “option” under an ESOP – that is a right but not an obligation – to purchase shares in the company at certain scheduled times in the future. The employee will have the right to buy the shares for an agreed price (known as the exercise or strike price).

An employee “exercises their options” when they decide to buy the shares, thereby converting their options into real shares of the company. An employee’s option will normally “vest” (that is, become available to be exercised) gradually when certain vesting criteria are satisfied. The time frame of when options are vested is linked to the performance of the company and the length of service of the employee.

Options usually vest during a period of between three and five years although this will depend on the vesting schedule the employer uses. Before an option vests, an employee would normally have no right to vote or sell their options. If an employee exercises their options and buys shares in the company, they become a shareholder in the company with ownership rights. At that time, they will have the rights, benefits and obligations of being a shareholder and will be subject to the shareholders agreement.

Recent Changes to Tax Treatment of ESOPs in Australia

In July 2015, the Australian government changed the tax treatment of ESOPs for eligible companies making them significantly attractive to employers and employees. These changes increased the number of ESOPs Australian companies were offering key employees.

Under the previous system, an employee who entered into an ESOP had to pay income tax at the time they received those options or shares even though, at that time, they had not received any financial benefit. Every shareholder hopes to sell their shares for more than they bought them for, although the previous tax treatment of ESOPs made it even riskier for employees to opt into ESOP arrangements with their company.

The new system, however, changed the timing of tax payments. Since July 2015, employees will only pay tax on their shares or options when they receive a financial benefit (i.e. when the employee sells the shares). Employees have up to 15 years in which to defer their tax liability.

Are There Restrictions or Criteria to Benefit From the Tax Concessions?

A company must first satisfy the following criteria to receive tax concessions:

  • The business must be an Australian resident company;
  • The business must be unlisted on the stock exchange;
  • The business must be incorporated for no more than ten years;
  • The total annual turnover must be less than $50 million;
  • The exercise price must not be provided for less than the market value of shares in the company as at the date the options were granted;
  • The employee must hold the ESS interest for at least three years; and
  • Employees cannot hold more than 10% of a company.


If you are looking into long term ways to reward key employees and continue the growth of your company with them remaining a part of it, get in touch with our startup lawyers to discuss the options avilable to you.


How Franchisors Can Avoid Misleading and Deceptive Conduct

Wednesday 18 May | 11:00 - 11:45am

Ensure your franchise is not accused of misleading and deceptive conduct. Register for our free webinar today.
Register Now

New Kid on the Blockchain: Understanding the Proposed Laws for Crypto, NFT and Blockchain Projects

Wednesday 25 May | 10:00 - 10:45am

If you operate in the crypto space, ensure you understand the Federal Government’s proposed licensing and regulation changes. Register today for our free webinar.
Register Now

How to Expand Your Business Into a Franchise

Thursday 26 May | 11:00 - 11:45am

Drive rapid growth in your business by turning it into a franchise. To learn how, join our free webinar. Register today.
Register Now

Day in Court: What Happens When Your Business Goes to Court

Thursday 2 June | 11:00 - 11:45am

If your business is going to court, then you need to understand the process. Our free webinar will explain.
Register Now

How to Manage a Construction Dispute

Thursday 9 June | 11:00 - 11:45am

Protect your construction firm from disputes. To understand how, join our free webinar.
Register Now

Startup Financing: Venture Debt 101

Thursday 23 June | 11:00 - 11:45am

Learn how venture debt can help take your startup to the next level. Register for our free webinar today.
Register Now

About LegalVision: LegalVision is a commercial law firm that provides businesses with affordable and ongoing legal assistance through our industry-first membership.

By becoming a member, you'll have an experienced legal team ready to answer your questions, draft and review your contracts, and resolve your disputes. All the legal assistance your business needs, for a low monthly fee.

Learn more about our membership

Need Legal Help? Submit an Enquiry

If you would like to get in touch with our team and learn more about how our membership can help your business, fill out the form below.

Our Awards

  • 2020 Innovation Award 2020 Excellence in Technology & Innovation Finalist – Australasian Law Awards
  • 2020 Employer of Choice Award 2020 Employer of Choice Winner – Australasian Lawyer
  • 2020 Financial Times Award 2021 Fastest Growing Law Firm - Financial Times APAC 500
  • 2020 AFR Fast 100 List - Australian Financial Review
  • 2021 Law Firm of the Year Award 2021 Law Firm of the Year - Australasian Law Awards
  • 2019 Most Innovative Firm - Australasian Lawyer