In Australia, an employee stock ownership plan (also commonly referred to as ESOP) or employee share scheme (ESS) is an employee-owner scheme that provides a company’s workforce with an ownership interest in the company through stock ownership. This is often at a no upfront cost to employees and is offered as part of an employees’ remuneration package. ESOPs allow employees to receive shares or options to shares in the company they work for, so they receive financial benefits when the company performs well. A number of changes to ESOPs took effect from 1 July 2015. It is important you are aware of how the changes affect your business if you are interested in implementing a scheme.

Types of ESOPs

There are different types of employee share ownership plans; these all vary on the size of the company, the number of employees and the purpose of introducing the scheme. Moreover, schemes vary depending on whether the company is publicly listed or a proprietary and private company.

Common schemes include a Fully Paid Non-Voting Share Scheme, whereby the directors and controllers of the company own a large percentage of shares and do not wish to dilute their power when shares are offered. These schemes are common where the cost of purchasing a share is spread over a number of vesting years and the full price does not have to be paid until certain cliff dates are reached, for example, four year vesting with a one year cliff, meaning the allocation of shares will be distributed over four years, with shares being issued on an annual basis.

Reforms to ESOPs in Australia

On 1 July 2015, a number of changes and reforms were made to Australian employee share option plans. Significant changes were made to the Employee Share Schemes in the 2015 Federal Budget, which came into effect 1 July 2015.

Under the previous system, start-up employees who were issued shares or options had to pay income tax at the time they receive those shares or options, regardless of whether or not they realised any financial benefit from them.

Under the new changes, employees will generally not be liable to pay up-front tax on those shares or options. Employees will only have to pay tax on their shares when they receive a financial benefit from those shares (including converting the options to shares). There are a number of requirements a company must fit in order to receive the tax and concession benefits. It is important a company is correctly structured and legal documents are properly drafted to receive tax concessions.

Tax Changes to ESOPs

Employees issued with options under ESSs will be able to defer tax until they exercise the share option to convert and realise financial benefits. Employees have up to 15 years to defer their tax liability. The taxing point will take place at the earliest of one of the following times:

  • When the employee ceases the employment in respect of which they acquired the right;
  • Fifteen years after the employee acquired the right;
  • When there are no longer any genuine restrictions on the disposal of the right and there is no real risk of the employee forfeiting the right; or
  • When the right is exercised and there is no real risk of the employee forfeiting the resulting share and there is no genuine restriction on the disposal of the resulting share.


LegalVision can assist you with drafting documents for your employee share scheme or employee share ownership plan. LegalVision has a team of great lawyers experienced in ESOPs and ESSs who can assist you. Please call our office on 1300 544 755 and our Client Care team will happily provide you with an obligation-free consultation and a fixed-fee quote.

Lachlan McKnight
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