In 2015 new laws applying to Employee Share Option Plans (ESOPs) came into effect in Australia which clarified the use by startup companies of methods for awarding shares and share options to their employees. An ESOP Australia is a formal written statement that a startup uses to defined how employees or other members of the company (aside from the founders) can receive or purchase shares in it. Any given recipient, based on the new ESOP laws, cannot receive more than 10% of the value of the company.

The main benefit of the new law is that under specific circumstances the beneficiary of these shares can qualify for a small startup tax concession on the shares. This means that the recipient is not taxed on the market value of the shares on the date that they receive the shares but rather they only pay the tax when they sell them.

Shares in the company are defined as representing direct ownership in the company, that is a share unit represent a part of the total value of the company (referred to as an ‘ordinary share’). Options confer the right on a person to receive shares under certain conditions (after a period of time has elapsed, they reach a certain value or a premium is paid).

For a startup company to implement a compliant ESOP scheme it needs to meet the following qualifications:

• Where the ESOP plan offers both shares and options, it must be made available for at least 75% of employees that have been employed for three years or more.
• Share options issued under the ESOP have an exercise price that is above the valuation of the shares at the time they are offered.
• The company (and companies in a group structure of which it is a part) cannot have been in operation for more than 10 years.
• The company (and companies in a group of which it is a part) cannot have annual turnover greater than $50 million in the year the shares are issued.
• Shares must be held for a minimum of three years by the beneficiary or until they cease employment with the company.
• The company must be regarded as an Australian resident company for taxation purposes and not be listed on the stock exchange.

The principal benefits of the ESOP Australia legislation is that it confers some benefits to the beneficiaries of share option schemes in startup companies. It is important, however, that such schemes be implemented correctly otherwise those tax concessions will not be available and the startup cannot represent to employees that such benefits are ‘tax free‘.