If you acquire an interest in a company that qualifies as a start-up, the employee share scheme (ESS) start-up concession can eliminate upfront tax on discounted shares or options.
This guide explains the rules, benefits and pitfalls of the ESS start-up concession, a powerful incentive for early-stage companies. It helps start-ups attract and retain top talent without immediate cash outlay.
If the company does not meet the start-up criteria, any ‘discount’ you receive on your ESS interest is generally taxed at your marginal rate when you acquire it. However, an exception applies if the ESS qualifies for concessional tax treatment, such as the ESS tax deferral scheme.
What is the ESS start-up concession?
The start-up concession under Division 83A of the Income Tax Assessment Act 1997 (Cth) (Tax Act) provides tax relief for eligible employees. It applies when they receive discounted shares or options in a qualifying start-up company.
Rather than taxing the discount as ordinary income upfront, the discount is either:
- Ignored entirely (if shares are issued at a small discount, i.e. ≥85% of market value); or
- Taxed only when the option is exercised and the shares are sold, generally under the capital gains tax regime.
This creates a powerful employee incentive – reducing upfront tax burdens while aligning long-term rewards with company growth.
What is a discount?
A discount exists if you pay less for the ESS interest than its market value at the time of acquisition.
If there is a ‘discount’, you will be liable to pay tax on the discount, notwithstanding the fact that you have not received any benefit from the ESS.
It is for this reason that the Tax Act provides you with the start-up concession which allows you to reduce the taxable discount to nil.
How do I qualify for the start-up concession?
To be eligible for the start-up concession, the following conditions must be met:
Company Criteria
The company in which you get the ESS interest must:
- have been incorporated less than 10 years before the start of the income year in which you acquire the ESS interest;
- be an Australian resident company;
- have an aggregated turnover of less than $50 million;
- not be a share trader or investment company; and
- not be listed on a stock exchange.
Share Criteria
If the ESS interest is a share in the company:
- the share must be an ordinary class share; and
- the discount must be no more than 15% of the ordinary share’s market value when acquired.
Option Criteria
If the ESS interest is an option to acquire a share in the company:
- the option must be over an ordinary class share; and
- the exercise price must be equal to, or greater than, the market value of the ordinary class share that will be acquired.
Participant Criteria
The following additional criteria must be satisfied:
- You must not be able to dispose of the ESS interest until either 3 years from the time you acquire the ESS interest, or when you cease your employment or engagement with the company; and
- You, together with your associates, must not hold, or have the right to acquire more than 10% of the shares in the company.
What are the benefits of qualifying for the start-up concession?
If you qualify for the start-up concession, the immediate benefit is that any discount on your ESS interest is not taxed at the time of grant. Instead, tax only arises later under the capital gains tax (CGT) rules.
In practice, this means:
- Capital account treatment – your ESS interest is treated as a capital asset, so any gain is subject to CGT. If you hold the interest for at least 12 months, you may also qualify for the 50% CGT discount.
- Shares issued directly – if your ESS interest is a share, its CGT cost base is the market value at the time you acquired it.
- Options – if you sell an option, your cost base is the amount you paid to acquire and sell the option. If you exercise the option and then sell the resulting share, the exercise price you paid is added to the cost base of the share.
- Acquisition date for shares – if you acquire a share by exercising an option, the acquisition date of the share is taken to be when you first acquired the option.
Together, these rules can significantly reduce your upfront tax liability and improve after-tax outcomes if the company grows in value.
Worked Examples
Case Study: Shares Issued Directly
Emma is granted 5,000 ordinary shares in a qualifying start-up at $9.00 per share. At the time of issue, the market value is $10.00 per share.
- Market value = $50,000
- Amount paid = $45,000
- Discount = $5,000
If Emma qualifies for the start-up concession, the $5,000 discount is not taxed upfront. Instead, Emma’s cost base for CGT purposes is the market value when the shares were acquired ($50,000).
If Emma later sells the shares for $150,000 after holding them for more than 12 months, her capital gain is $100,000. She may apply the 50% CGT discount, reducing her taxable gain to $50,000.
Case Study: Options Sold Without Exercise
Liam receives 2,000 options with an exercise price of $20.00, which equals the market value of the underlying shares at grant. He pays nothing to acquire the options at grant.
Three years later, the company’s share price has risen to $50.00. Each option is now worth $30.00. Liam sells all 2,000 options for $60,000.
- Cost base of options = $0 (he paid nothing at grant)
- Sale proceeds = $60,000
- Capital gain = $60,000
If Liam qualifies for the start-up concession, the options will be on capital account and Liam will only be taxed under the CGT rules when he sells them. Because he held the options for more than 12 months, he may also apply the 50% CGT discount, reducing his taxable gain to $30,000.
Case Study: Options Exercised, Then Shares Sold
Sophie is granted 1,000 options with an exercise price of $30.00, which equals the market value at grant.
Four years later, the share price has risen to $120.00. Sophie exercises all her options and pays $30,000. She then sells the shares for $120,000.
- Sale proceeds = $120,000
- Cost base = $30,000 (exercise price paid)
- Capital gain = $90,000
If Sophie qualifies for the start-up concession, she will be taxed under the CGT rules when she sells the shares. As the acquisition date of the shares is taken to be the date she first acquired the options, Sophie will qualify for the 50% CGT discount and her taxable gain wil be reduced to $45,000.
Case Study: Acquisition Date of Shares from Options
David is granted 500 options in July 2022 with an exercise price equal to market value at grant ($40.00). He exercises the options in July 2024 when the share price is $100.00 and sells the resulting shares in August 2025 for $150.00 each.
- Exercise cost = $20,000 (500 × $40)
- Sale proceeds = $75,000 (500 × $150)
- Capital gain = $55,000
If David qualifies for the start-up concession, for CGT purposes, the acquisition date of the shares is backdated to July 2022 (when David first acquired the options). This means he has satisfied the 12-month holding period and can apply the 50% CGT discount, reducing his taxable gain to $27,500.
How does this interact with the tax deferral scheme?
If you don’t meet the start-up criteria, the tax deferral scheme may still allow you to defer tax until a later point (such as sale or cessation of employment). See our Guide to Tax Deferral for Employee Share Scheme.
For further information on how we can support you with employee share scheme advice and structuring, visit our Employee Share Schemes page.