A Comprehensive Guide to Employee Share Scheme

by | Apr 16, 2024

What are Employee Share Schemes? 

Employee Share Schemes (ESS) refer to programs initiated by companies to offer their employees the opportunity to acquire shares or an ownership interest in the company. These schemes are designed to incentivise and reward employees by providing them with a stake in the company’s success. ESS can take various forms, including share options, restricted stock units (RSUs), or employee share purchase plans (ESPPs). 

Importance of ESS in the Australian workforce 

   Employee Share Schemes play a crucial role in the Australian workforce, fostering employee engagement, retention, and alignment of interests between employees and shareholders. By offering employees the chance to become shareholders, companies can motivate their workforce to contribute to the company’s growth and success. Moreover, ESS can also serve as a powerful tool for attracting top talent and enhancing employee loyalty. In Australia, ESS are governed by regulations set forth by the Australian Taxation Office (ATO), ensuring compliance and fairness in their implementation. Understanding and adhering to these regulations is essential for both employers and employees participating in ESS programs. 

Types of ESS commonly used in Australia 

1. Share Options 

Share options grant employees the right to purchase company shares at a predetermined price within a specified time frame. This allows employees to benefit from any increase in the company’s share price over time. 

2. Restricted Stock Units (RSUs) 

RSUs are shares of company stock granted to employees, typically subject to certain restrictions such as a vesting period. Once the restrictions lapse, employees gain full ownership of the shares. 

3. Employee Share Purchase Plans (ESPPs) 

 ESPPs enable employees to purchase company shares at a discounted price, often through payroll deductions. This allows employees to acquire shares with favorable terms, encouraging long-term investment in the company. 

Types of ESS commonly used in Australia

Benefits of ESS for both employers and employees 

For Employers: 

  • Enhanced employee motivation and retention: ESS aligns employees’ interests with those of shareholders, fostering a sense of ownership and commitment to the company’s success. 
  • Attraction of top talent: Offering ESS can make your business more attractive to potential employees, especially in competitive job markets. 
  • Tax benefits: Some ESS programs may offer tax advantages for employers, depending on the structure of the scheme and compliance with relevant regulations. 

For Employees: 

  • Financial incentives: ESS provides employees with the opportunity to share in the company’s financial success and potentially benefit from stock price appreciation. 
  • Sense of ownership: Owning shares in the company can instill a sense of pride and ownership among employees, leading to increased engagement and loyalty. 
  • Potential tax advantages: Depending on the type of ESS and individual circumstances, employees may enjoy tax benefits such as reduced tax liability or favorable capital gains treatment. 

Compliance requirements for employers

1. Reporting obligations

Employers participating in Employee Share Schemes (ESS) in Australia are required to fulfill specific reporting obligations to the Australian Taxation Office (ATO). This includes providing accurate and timely information regarding the implementation and operation of the ESS to ensure compliance with tax laws and regulations.

2. Tax implications for employers

Employers must be aware of the tax implications associated with implementing and administering ESS. This may include obligations such as withholding and remitting tax on certain ESS benefits provided to employees and ensuring accurate reporting of ESS-related expenses and transactions to the ATO. 

Tax treatment for employees participating in ESS 

1. Taxation of shares at the time of acquisition

Employees participating in Employee Share Schemes (ESS) may be subject to taxation at the time of acquiring shares or rights under the scheme. The tax treatment varies depending on the type of ESS and specific circumstances. Generally, employees are required to include the value of the shares or rights acquired as assessable income in their tax return for the relevant income year. 

2. Taxation upon disposal of shares

When employees dispose of shares acquired through an ESS, they may be liable for capital gains tax (CGT) on any capital gains made from the disposal. The capital gain is calculated as the difference between the sale proceeds and the cost base of the shares. However, certain concessions or exemptions may apply depending on the employee’s individual circumstances and the length of time the shares were held.

3. Impact of ESS on employee income tax obligations:

Employee Share Schemes can have significant implications for employee income tax obligations. In addition to the taxation of shares at the time of acquisition and upon disposal, employees may also be subject to other tax consequences such as: 

  • Pay-As-You-Go (PAYG) withholding obligations on certain ESS benefits. 
  • Potential eligibility for tax concessions or exemptions, depending on the type of ESS and specific criteria outlined by the ATO. 
  • Reporting requirements for ESS-related income and deductions in their tax return to ensure compliance with tax laws. 

ATO Regulations on Employee Share Schemes 

Eligibility criteria for employees to participate in ESS

Criteria outlined by the ATO 

The Australian Taxation Office (ATO) outlines specific eligibility criteria that employees must meet to participate in Employee Share Schemes (ESS). While these criteria may vary depending on the type of ESS and individual circumstances, some common eligibility requirements may include: 

  • Employment status: Typically, employees must be currently employed by the company offering the ESS to participate in the scheme. 
  • Length of service: Some ESS programs may require employees to have completed a minimum period of service before becoming eligible to participate. 
  • Participation limits: Certain ESS may impose restrictions on the maximum number of shares or rights that an employee can acquire under the scheme. 

Potential restrictions or limitations: 

  • Vesting periods: Many ESS programs include vesting periods during which employees must wait before gaining full ownership of the shares or rights acquired under the scheme. Employees may be required to fulfill specific conditions, such as continued employment, before the shares vest. 
  • Exercise periods: In the case of share options, employees may be subject to exercise periods during which they can exercise their option to purchase shares at the predetermined price. Failure to exercise within the specified timeframe may result in forfeiture of the option. 
  • Legal and regulatory requirements: ESS programs must comply with legal and regulatory requirements, which may impose additional restrictions or limitations on employee participation. For example, certain industries or types of companies may have specific regulations governing ESS participation. 

Exemptions and concessions available under ATO regulations for ESS 

Under Australian Taxation Office (ATO) regulations, there are exemptions and concessions available for Employee Share Schemes (ESS) that aim to provide certain benefits or relief to employees and employers. These exemptions and concessions may vary depending on the specific circumstances and type of ESS, but some common ones include: 

  • Start-up Concessions: The ATO offers concessions specifically designed to support start-up companies by providing tax incentives for employees participating in ESS. These concessions may include tax deferrals, capital gains exemptions, or other benefits aimed at promoting investment and growth in innovative start-up ventures.
  • Employee Share Scheme (ESS) tax concessions: The ATO provides various tax concessions for employees participating in certain types of ESS, such as Employee Share Option Plans (ESOPs) or Employee Share Acquisition Plans (ESAPs). These concessions may include reduced tax rates, deferral of tax liabilities, or other favorable tax treatment for qualifying ESS arrangements.
  • Employee Share Scheme (ESS) withholding concessions: Employers may be eligible for withholding concessions under the ATO regulations when reporting and remitting tax on ESS benefits provided to employees. These concessions may simplify the withholding process or provide relief from certain withholding obligations, depending on the circumstances of the ESS. 

Key Considerations for Employers Implementing ESS 

Designing an effective ESS program: 

Implementing a successful Employee Share Scheme (ESS) requires careful consideration of various factors, including the program objectives, eligibility criteria, and the scheme’s structure. Employers should design an ESS program that aligns with their business goals, motivates employees, and ensures fairness and equity in the distribution of shares or ownership interests. 

Communication and transparency with employees: 

Effective communication and transparency are essential for the successful implementation of an ESS program. Employers should clearly communicate the details of the scheme to employees, including eligibility criteria, participation options, and potential benefits. Transparent communication fosters trust and engagement among employees and helps ensure that they fully understand the implications and opportunities associated with participating in the ESS.  

Accounting for ESS-related expenses: 

Employers must accurately account for ESS-related expenses, including the fair value of shares or rights granted to employees, and any associated administrative costs. Proper accounting ensures compliance with financial reporting requirements and enables employers to track the costs and benefits of the ESS program effectively. Employers should work closely with their accounting and finance teams to ensure accurate and transparent reporting of ESS expenses in financial statements and disclosures.  

Compliance with ATO regulations to avoid penalties: 

Compliance with Australian Taxation Office (ATO) regulations is critical for employers implementing ESS programs to avoid potential penalties and legal risks. Employers should familiarise themselves with the relevant ATO guidelines and requirements for ESS, including reporting obligations, tax treatment, and eligibility criteria. By staying informed and ensuring compliance with ATO regulations, employers can mitigate risks and ensure the successful operation of their ESS program while avoiding costly penalties or sanctions.  

Contact Us 

For expert guidance in implementing an effective Employee Share Scheme (ESS) that complies with Australian Taxation Office (ATO) regulations, reach out to us at Chan & Naylor. Our skilled team of accountants specialises in navigating complex tax regulations and designing tailored ESS programs to drive growth and success for your business. Contact us today to learn how we can help you maximise the benefits of ESS and grow your business effectively. 

About Chan & Naylor 

Since 1990, Chan & Naylor has partnered with business owners in managing their taxes and building a tax-effective wealth. Choosing Chan & Naylor means you’re not just selecting a service provider; you’re gaining a partner aligned with your financial goals. You’ll have access to a dedicated client manager supported by a team of accountants that specialises in business and property tax. 


This guide serves as general advice and may not account for the unique circumstances of individual readers. For personalised and strategic solutions tailored to your specific situation, we invite you to seek professional advice from Chan & Naylor. Our highly experienced team is dedicated to helping you navigate the complexities of Australian taxation, ensuring that your financial strategies align with the latest regulations. Contact us today to embark on a path of informed and customised tax planning for your property investments.