Employee equity can be a powerful part of your remuneration strategy. But once a plan is in place, it’s easy for compliance to slip as the business grows and circumstances change. Many businesses tend to set and forget their plan rules and do not review them regularly.
An out of date employee share option plan (ESOP) could become a laden tax trap for your employees. It could also cause a reporting nightmare for the business as you fail to continue to monitor the tax treatment of options/shares issued under plan, including when they vest or are transferred. The issue for the business is that it may become liable to payroll tax at unexpected times. The issue for the employees is that they may be taxed on the vesting of their options or shares, without the ability to dispose of them to pay their tax bill. They also may without proper planning, end up paying double the tax or more than what they otherwise could legitimately pay. These issues may only come to light on a sale event, or a later ATO audit, with back tax, penalties and interest becoming potentially payable.
Below we set out the issues we most commonly see, and how to best deal with them.
- The start-up tax concession (what it is, and why it matters)
The startup tax concession provides one of the most beneficial tax outcomes for employees who receive options or shares as part of their remuneration. Many startups have designed their ESOP or used a template ESOP designed to qualify for the concession.
However in our experience over time startups do not continue to monitor their eligibility and continue to assume that the startup tax concession applies, even when the conditions for its application are no longer met.
If that occurs, without proper planning and consultation, your employees could end up paying potentially significantly higher tax that they would otherwise have paid on future option offers. They may also be hit with a tax bill earlier than anticipated, on the vesting of their options or shares.
- Using outdated valuations or no valuation at the time of grant
Market value needs to be determined at the time you issue the shares or options. Basing your valuation on a recent pitch deck, a prior round price, or a foreign “409A-style” number is a common way to fall outside the rules. Build a standing process to refresh valuation before each grant (and after value-moving events such as a capital raise or major contract).
If your ESOP qualifies for the startup tax concession, then you will also need to consider whether you wish to use the safe harbour valuation methodology which is approved by the ATO.
For unlisted shares issued under the startup tax concession, the ATO’s legislative instrument LI 2025/19 sets out valuation methods that may be used (e.g. net tangible assets or a comprehensive expert valuation) and when they are appropriate. We often see clients applying LI 2025/19 (or its predecessor ESS 2015/1) when they are not eligible or alternatively failing to undertake a valuation using LI 2025/19 contemporaneously with the issue of options, and relying on an out of date valuation to set the exercise price.
- Assuming you’re still STC-eligible after you scale past $50 million or are more than 10 years old
Success changes the analysis. Once your aggregated turnover exceeds $50 million or your corporate group is more than 10 years old, new offers will not qualify for the startup tax concession. We regularly see scale-ups continue to issue options or shares on “start-up settings” until due diligence flushes it out or their accountants review the plan and raise a red flag. Consider an eligibility check before each offer cycle and be ready to consider the application of the tax-deferred or taxed-upfront pathways when required.
- ESOP rules are not updated to operate outside the STC
Many plans were drafted on the assumption the startup tax concession would always apply. Once you age out, raise a large round, list, or start offering offshore, those rules can conflict with the tax and Corporations Act settings that are then triggered. Maintain ESOP plan rules that allow you to transition offers from the startup tax concession to tax-deferred, taxed-upfront offers or premium priced options, together with country specific annexures. Include broad discretions so you can transition participants cleanly as your status changes.
- Overlooking payroll tax on options and shares
Payroll tax is state-based and often turns on the value of the option or share at a particular time (commonly grant or vesting). Even where employees have nil income tax under the startup tax concession, payroll tax may still arise. Decide your “relevant day”, apply a compliant valuation method, and document the position consistently for each state or territory where you have employees.
- Issuing to overseas participants without local securities laws and tax compliance
Copy-pasting Australian documents rarely works offshore. Local securities laws may require regulatory filings, caps on the number of options or shares issued or employees you issue them to, or prescribed disclosures, and local tax rules can impose withholding and employer reporting. You should ensure that your plan rules are flexible enough to allow country specific addendums, you should confirm any local law offering exemptions and consider alternatives (e.g. cash-settled or phantom equity) where the regulatory burden is disproportionate.
- Missing Australian disclosure requirements under the Corporations Act (post-2022 ESS regime)
Since 1 October 2022, employee equity offers sit within the updated employee share scheme framework in the Corporations Act. There are offer caps, content requirements and process steps, with ASIC relief in some areas. Documents that were compliant under the old Class Orders may not be compliant now. Make sure your offer letters, disclosure, caps and sale-facility mechanics line up with the current regime. Further make sure that any offers you make in a rolling 12 month period are carefully scrutinised to ensure you comply with your disclosure obligations.
- No plan mechanics for employees who change tax residence
Mobility is now the norm. A change in tax residence can alter taxing points, withholding, reporting and applicable tax treatment. Good plan rules include mobility clauses and give the board flexibility to adjust vesting or settlement to keep the employee and the company compliant across borders.
- Incorrect or late annual ESS reporting to the ATO
You must give ESS statements to employees by 14 July and lodge the ESS annual report by 14 August each year in which interests are granted or a taxing point occurs. Mismatches in TFNs, grant dates, plan identifiers and discount values are common.
A practical tune-up checklist
- Run an eligibility check (startup tax concession or not) before every offer.
- Maintain a written valuation playbook (method, frequency, approver, events that trigger a refresh).
- Use country addenda and mobility clauses for cross-border staff.
- Align all documentation to the post-2022 ESS regime.
- Calendar 14 July / 14 August and test your reporting extracts ahead of time.
How we can help
We review and refresh established plans, prepare country specific annexures, and work closely with you and your tax advisors to ensure your employee share scheme remains compliant. If helpful, we can start with a focused ESOP health check and a short action plan tailored to your stage and footprint.
