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Employee Shares Schemes - On the Money

Victoria Konya | March 17th, 2017

Employee share schemes (ESS) are a useful tool to incentivise and retain high performing employees, and can positively impact the overall performance of your company.

Recent research suggests that ASX listed companies with high levels of employee ownership have had a dramatic increase in their share price over the past five and a half years, compared with other ASX listed companies.

The Employee Ownership Australia (EOA) Index tracks the share price of listed companies with high levels of employee ownership. According to a media release published on 14 February 2017, the share price of EOA Index companies increased, on average, by 40 percent over the past five and a half years, compared with just 23 per cent for the ASX 200 overall.

To be included in the EOA index, a company must have had an employee ownership scheme open to its entire workforce, with at least 30 percent of employees participating. Within the ASX 200, 52 companies met this criteria.

How do Employee Share Schemes Work?

Employee share schemes provide opportunities to high performing employees to acquire equity in your company, by:

  • acquiring shares in your company at a discounted price; and/or
  • acquiring shares in the company at some point in the future (through an option to buy shares).

Employee share schemes benefit both employee and employer.

For the employer, it ensures high performing employees are motivated and have an opportunity to play a more active role in the management of the business, as they can feel a direct connection between business decisions and the bottom line and have “skin in the game”.

For employees, they can benefit from special tax treatment on their investment and can reap financial rewards if the company is doing well.

Thanks to tax changes introduced on 1 July 2015, employees can benefit from concessional tax treatments on their investment, including the right to own up to 10% of the company or control up to 10% of the voting rights in the company before they lose concessional tax treatment.

Also, startups can now benefit from new concessions introduced on 1 July 2015 including:

  • if employees acquire shares at a discount, they will not be taxed on the discounted amount;
  • any gain or loss on disposal of rights or shares will be assessed under the CGT regime. When working out if the 50% CGT discount applies, the period of ownership of a share acquired on exercise of a right is taken to have started when the right was acquired.

How to Access the Startup Concessions?

According to the Australian Taxation Office, the following criteria must be met to qualify for the startup concessions:

Startup company

  • the company must not be listed on any stock exchange
  • all companies in the corporate group must have been incorporated for less than 10 years
  • aggregated annual turnover of the group must not exceed $50 million


  • the employer must be an Australian resident company


  • employees must hold ESS interests for at least 3 years

ESS interests

  • a share must be provided at a discount no greater than 15% of market value
  • an option must have an exercise price (or strike price) that is greater than or equal to the market value of an ordinary share in the issuing company.

Market value for startups can be determined according to approved market valuations methods.

What Rules Should Apply to an ESS?

If you are considering an employee share scheme, some key issues that you should consider are:

  • Will the employee have ordinary shares which grant them the right to vote at general meetings of shareholders, or will they have special class shares with rights to dividends only?
  • Will employees have the right to sell their shares before they are fully paid for?
  • Must employees sell back their shares when they leave the company, and if so, at what price?
  • Must the employees achieve certain key performance targets in order to hold on to their shares?
  • What sort of finance arrangement will be offered to the employee? (ie, Vendor finance, salary sacrifice, dividends)
  • How long will the employee have to pay off the purchase price of their shares?
  • Will the employee be entitled to dividends or will dividends be re-invested into the company?
  • Does the company have an up-to-date shareholder agreement, and will employees be required to sign up to the shareholder agreement when they acquire shares?

The rules of the employee share scheme should be carefully documented through an employee share scheme plan and shareholder agreement. If you need advice on employee share schemes, get in touch with us:

Victoria Konya Victoria Konya
Senior Associate
+61 3 9620 9660
  Alison Rees
+61 3 9620 9660

Victoria Konya

Victoria is a commercial and intellectual property (IP) lawyer who represents a large number of small to medium enterprises and high net worth clients in a broad range of complex commercial matters, and in the protection and commercialisation of IP.