As a general rule, if you acquire an interest under an employee share scheme (ESS) you will be taxed (at your marginal rate of tax) on any ‘discount’ you receive at the time you acquire the interest under the ESS (ESS interest), unless the ESS qualifies for concession tax treatment such as the start-up concession.
What is a discount?
There is a ‘discount’ if the amount you pay to acquire the ESS interest is less than the market value of the ESS interest at that time.
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 Income Tax Assessment Act 1997 (Cth) (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:
- (Ordinary Share) the ESS interest must either be an ordinary class share, or an option over an ordinary class share;
- (Share Trader or Investment Company) the company in which you get the ESS interest must not be a share trader or investment company;
- (Disposal of ESS interest) 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;
- (Share Threshold) you, together with your associates, must not hold, or have the right to acquire more than 10% of the shares in the company;
- (Stock Exchange) the company in which you get the ESS interest cannot be listed on a stock exchange;
- (Incorporation Date) the company must have been incorporated less than 10 years before the start of the income year in which you acquire the ESS interest;
- (Aggregated Turnover) the aggregated turnover of the company must be less than $50 million;
- (Discount Threshold for Shares) if the ESS interest is a share, then the discount must be no more than 15% of its market value when acquired;
- (Exercise Price for Options) if the ESS interest is an option, the exercise price must be equal to or greater than the market value of the ordinary share that will be acquired;
- (Residency Status) the company must be an Australian resident.
What are the benefits of qualifying for the start-up concession?
If the start-up concession applies:
- any ‘discount’ you receive when you acquire the ESS interest will not be taxable to you at the time of grant;
- you will hold the ESS interest on capital account, and may therefore qualify for the 50% CGT discount on a later disposal of the ESS interest;
- if the ESS interest is an option, and you sell the option, the cost base of the option is any amount you paid to acquire and sell the option;
- if you exercise the option and then sell the resulting share, the amount you paid to exercise the option will be added to the cost base of the share;
- if you acquire a share by exercising an option, the date of acquisition of the share is taken to be the date the right was first acquired; and
- if the ESS interest is a share, the CGT cost base of the share will be the market value of the share when you acquired it.
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