Employee Share Scheme

November 10, 2022

Throughout my professional career, I have been tasked with by business clients to playing ball with the ESS scheme. At a high level, my observations with clients over the years can be summarised in seven (7) key nuggets as follows:


  1. Employers do have genuine interests in offering employees equity in a business by retaining and aligning employee interest with the business;


  1. It is commonly seen being done in start-up companies where the business employers are particularly cash poor;


  1. It is commonly done so in a ASX small-cap listed space, whereby the taxation implications are not easily understood by the directors and employees who are being directly impacted;


  1. It is extremely rare to apply the technical concepts of ESS provisions to small to medium enterprises space;


  1. Whilst the ESS rules provide deferral taxation concessions, they are still somewhat limiting in many given sets of situations;


  1. It is common to see ESS interests being incorrectly vested to SMSF, causing unintended excess superannuation contributions and taxation complications; and


  1. It is often seen arrangements falling apart, coming down to complexity (both taxation and corporations laws) in applying the ESS schemes, valuations requirements not being understood, and schemes just simply being more complex than cash transactions.


I now turn my attention to sharing some common tips and traps of dealing with ESS interests. The materials contained in this article are by no way meant to cover every possible situations, doing so will be beyond the scope of such exercise. Where applicable, readers are encouraged to seek independent professional advice that applies to their own situation.

10% Test

Maximum ownership interest test requires that the ESS interests must not result in the employee holding a beneficial interest in more than 10% of the shares of the company (and the employee must not be in the position to cast votes, or control the casting of votes, of more than 10% of the maximum number of votes that may be cast at a general meeting of the company.

When determining the 10% it is required to include the shares that can be acquired if all of the holder’s options were exercised. That is, the 10% calculation is to be done on a fully diluted basis. The consequence of this rule is that founders and major shareholders cannot benefit from the start-up concessions.


A ZEPO is an option issued at no cost with a nil exercise price. Exercise will normally be subject to the vesting conditions and performance hurdles detailed in relation to market price options. Performance rights on the other hand are, in substance, the same as ZEPOs except that they are not options in its legal form but rather contractual rights to receive equity in future if certain conditions and/or performance hurdles are met.

Once exercised and shares are allotted to you and/ or your nominated entity (Trust and/ or SMSF), if these shares then will not be subject to further conditions such as real risk of forfeiture you will be taxed on the value of the shares at the prevailing share price.


These are in substance the same as Zepos except that they are not options in legal form, but merely contractual rights to receive shares in the future if certain conditions and/ or performance hurdles are met. For example, they may vast over a period of 5 years, with 20% of the total entitlement vesting at each annual date, provided the employee remains in employment and certain performance hurdles are met.


In an ESS, the employee receives shares or options as part of their compensation for services provided to their employer. The shares are typically provided to the individual who may then nominate that they be issued in the name of their SMSF or Trust they control. However, from an income tax perspective, the receipt of the shares or options by the SMSF or Trust nonetheless remains a potential tax trigger for that individual. The individual needs to include in their assessable income the amount equal to the market value of the shares or options less the consideration paid.

With the only exceptional argument is that the individual can mount a case that the shares received was not in exchange of personal services being performed instead it is via business structure.


The value added to your SMSF is generally considered a personal contribution from the employee (yourself) to your SMSF if you were granted personal rights to receive shares, or share options at a discount to market value, under an employee share scheme and either:

  • you surrender those rights so that the SMSF receives the shares or share options, or
  • you exercise those rights but nominate your SMSF to receive the shares or share options.

Similar to income tax disclosure issues, many taxpayers inadvertently fail to recognise the issue of the shares or options to the SMSF at fair market value and/or properly account for the discounted acquisition as a superannuation contribution.

The ATO (Taxpayer Alert TA 2010/3) has made it clear when an SMSF acquires shares through an ESS, the difference between the market price and the consideration, that is the discounted amount, will be treated as a contribution towards the fund and subject to usual contributions cap counting. This may cause excess superannuation contribution issues


A fundamental issue to consider is whether or not an SMSF is able to acquire the ESS shares or options in the first place. Technically, it depends on how the arrangement is structured.

Where the shares or options are not listed on a stock exchange, an SMSF may be precluded from acquiring an ESS interests.

Under section 66 of the SIS Act, a SMSF is generally prohibited from acquiring assets from related parties of the fund unless:

  1. the assets concerned are listed securities acquired at market value (e.g. a share or option listed on the ASX), or
  1. the acquired asset represents an investment in a related party of the fund (i.e. the employer company is under the control of the member’s group), and that investment does not exceed the 5% “in-house asset” limit.


Shareholder Approval – without shareholder approval, issues of ordinary shares by a listed company are capped at 15% per 12-month period. Shares and options issued under ESS/ ESOPs are included in the calculation of the 15% limit pursuant to ASX Listing Rule 7.1.


Section 260A of Corporations Act 2001 (Commonwealth) prohibits a company from financially assisting a person to acquire shares (by way of issue, transfer or otherwise) in the company or a holding company, unless the giving of assistance does not materially prejudice the company, its shareholders or its ability to pay its creditors, is approved by shareholders under s 260B, or is exempted under s 260C (which includes an exemption for approved employee share schemes as defined).


To enjoy the deferral taxation and start-up concessions, one of the conditions is to satisfy the employment condition by the issuing company. Ceasing employment may cause unintended taxation consequences if options/ performance rights hurdles have been met and vested to ordinary class shares (pre 30 June 2022).

The question remains if the plan and/ or shareholder agreement forces leavers to sell their vested shares. It follows the procedures set out in Section 257B of the Corporations Act with respect to the buy-back.

It is also important to be aware of the taxation implications of buying back employee shares. Particularly the apportionment between capital/dividend and the application of Section 45B. On that issue one needs to consider the methodology set out in PSLA 2007/9 regarding the acceptable calculations of the capital/dividend split.


A company or an associate of a company must not give a person a benefit in connection with that person’s, or someone else’s, retirement from a board or managerial office in the company or a related

body corporate, without the approval of shareholders of the company pursuant to Corporations Act Section 200B.

The term “benefit” is defined broadly to include “any benefit, whether by payment of cash or otherwise”.

Retirement from office includes loss of office, resignation from the office or the death of the person when they held the office. A board or managerial office refers to an office of director or any other office in connection with the management of the body corporate’s affairs that is held by a person who holds (or at any time in the prior 12 months held) an office of director of the body corporate or any related body corporate.


In general, an offer of securities (shares or options) by a company will require a disclosure document (Prospectus or Offer Information Statement), unless the offer is covered by a statutory exemption contained in Section 708 of the Corporations Act. The exemptions can be summarised as:

  1. Small scale offering ($2m/20 acceptances in 12 months);
  2. Sophisticated investors; or
  3. Senior management.


In order to successfully implement an ESS plan, A typical employee plan will have essentially three (3) central documents:

  1. the plan rules (and trust deed if a trust is used and the rules are not incorporated into the trust deed);
  2. an offer document;
  3. an application form

In determining the rights and obligations of the employee and issuer under an employee plan, regard must be had to all three documents.


Another issue is where an investor has invested a significant sum for a stake in the business. Often an investor will “gamble” a relatively significant amount for a small stake in the business. For example an investor may invest $50,000 for a 10% stake in the company. If the investor is granted ordinary shares, this establishes a value for the ordinary shares, and effectively has resulted in a valuation of the company of $500,000 which can adversely impact on employees whose taxing point occurs after the investment event.

However, more commonly investors insist on preferential shares which give them preferred rights to dividends and return of capital and additional voting rights. A shareholders agreement also commonly

provides for founders shares to be repurchased by the company in the event a founder is a bad leaver in accordance with a vesting schedule.

If an investor paid $50,000 for 10% preferential shares, it is strongly arguable that the ordinary shares should have a significantly lower value due to the preferred rights attaching to the preference shares. For this reason it is preferable for investors to be issued with different classes of shares from employees to ensure the value of the shares granted to employees are not given the same value as the investor shares.


The differences between the values calculated under AASB standards (specifically AASB 2 Share-based payment) and Division 83A ITAA97, but for taxpayers receiving options in “small cap” stocks, this differential is not unusual. There is a clear concessional approach taken by Div 83A when calculating the value of the unlisted options.

Given the lower valuations for tax purposes calculated with reference to the Regulations, it will be very common that the accounting expense debited to the P&L statement will be significantly larger than the tax value attributable to the ESS.

This is a communication piece with the client when thinking of implementing an ESS who is also a reporting entity (or on the verge of becoming one).


If the ESS scheme is too difficult to manage, more often than not it is and business employers do sway away from this convoluted rule. Business owners will then need to move away and look outside, essentially three alternatives:

  1. Loan funded plans
  2. Phantom equity plans
  3. Premium priced options


When ESS interests are proposed, consideration (hopefully) is given to the federal tax liability under Div 83A ITAA97 and the accounting implications. In my experience, less thought is given to the potential payroll tax liability that the granting of ESS interests may cause.

Payroll Tax under WA Office of State Revenue squarely deals with this under technical reference:



A company that issues ESS interests will need to submit annual employee share scheme statements to the employee and the ATO regarding the ESS interests issued.

The employer must issue an ESS statement to each employee by 14 July each year. The ESS Statement outlines the assessable discount for upfront taxation on ESS interests issued during that year, as well as assessable amounts arising from deferred taxing points that occurred during that year.

The ATO have also added sections for options and shares issued under the Start-up concession for the 2016 income year onwards (Nat form 734434A).


The ATO currently has the following in development:

  1. Employment cessation no longer applies post 1 July 2022
  2. Taxation Ruling 2010/1 – relaxation of ESS interests;
  3. In April 2022 Federal Budget Announcement of:
  • Increasing the value of shares unlisted employers can provide to employees – from $5,000 to $30,000 per year
  • Removing any share cap for employees to take advantage of a planned sale or listing
  • Reducing regulatory requirements for grants of equity to contractors


Of the three above, only one point 1 has been legislated and it is now law.


Our office has assisted an increased volume of business valuation in M&A transaction, internal restructure, shareholder buyout, and admitting key employees.

If you require assistance, please do not hesitate to contact our office at 08 9430 7888.


Information provided on this document is general in nature and does not constitute advice. GW Capital Group Pty Ltd will endeavour to update this document as needed. However, information can change without notice and GW Capital Group Pty Ltd does not guarantee the accuracy of information on the website, including information provided by third parties, at any particular time.

Every effort has been made to ensure that the information provided is accurate. Individuals must not rely on this information to make a financial or investment decision. Before making any decisions, we recommend you obtain independent advice or take into account your particular investment objectives, financials situation and individual needs.

GW Capital Group Pty Ltd does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this document. Except insofar as any liability under statute cannot be excluded, GW Capital Group Pty Ltd, its employees do not accept any liability for any error or omission on this document or for any resulting loss or damage suffered by the recipient or any other person.

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