How are employee share schemes (ESS) taxed in Australia?

Employee share schemes (ESS) give employees the right to acquire shares or options at a discount. The tax timing depends on the type of interest and whether a tax deferral applies.

For upfront taxation, the discount you receive when acquiring shares is included in your assessable income in the year you acquire them. For example, if you receive shares worth $10 per share but pay $7, the $3 discount per share is ordinary income.

For deferred taxation schemes, the discount is not taxed until a 'cessation time' occurs, typically when the restrictions are lifted, you leave the company, or seven years pass. Many startup ESS plans are structured to defer tax. From 1 July 2022, eligible startup ESS schemes received improved conditions: employees in qualifying companies can defer tax until they sell the shares, and the discount at acquisition is then taxed as a capital gain rather than income, potentially attracting the 50% CGT discount if shares are held over 12 months.

You should receive an ESS statement from your employer showing the amounts to include in your return. ESS income does not affect your PAYG withholding during the year, so many employees end up with a tax liability at lodgment time. If your ESS discount is large, you may want to increase your voluntary PAYG instalments to avoid a big bill in October.