The idea of employee share schemes (ESS) has exploded in the last few years, and it’s easy to see why. 

Not only do employee share schemes have the potential to grow your company’s profitability, but they also offer a chance for employees alike to build wealth in ways that are typically unavailable within traditional salary structures.

They can range from employee traditional share schemes where employees can purchase company shares to employee option schemes where employees own shares that vest over time.

So, in this post, we’ll explore how employee share schemes work, what they mean for small businesses, and their key benefits and potential downsides. 


What Is An Employee Share Scheme?

An employee share scheme allows employees to buy shares in the company they work for. 

The primary reason why small businesses implement employee share schemes is to incentivise and motivate their employees to perform. It also aids in aligning shareholder interests with those of the employee. 

Imagine this; you’re in a room with a few new employees sharing the dreams and ambitions that you have for the business. You tell them that you envision the business to grow tenfold in the next three years and that the $20,000 they will receive from the ESS scheme has the potential to grow to $200,000 in the next three years. That will greatly motivate them to grow the company, thus aligning the employees’ goals with the business goals. That’s fantastic as goal alignment is the most important factor in human resource management.

Typically, a business will implement an employee share scheme in one of two ways: 

  • traditional share schemes; or 
  • options to buy shares in the future.


Traditional Share Schemes

In simple terms, a traditional employee share scheme gives employees an outright opportunity to purchase company shares. 

Typically, an employer will give employees a few different options which they can use to acquire their shares: 

  • they can use their own funds and buy the shares upfront; 
  • they can use the dividends from shares they already own; 
  • they can opt for a salary sacrifice arrangement; or 
  • they can use a loan from their employer.


Option Share Schemes 

Option schemes allow employees to purchase shares in the company at some point on a future date once certain conditions are met. 

The conditions often have to do with performance targets or meeting a specific length of service at the business. 

Generally, the employee won’t have to pay any upfront fee to join the scheme and will only have to pay for the shares once their options vest (or once the conditions are met). When the vested shares become available, employees can buy them at the share price set out when the option was first made available. 

Once the conditions are met, the employee will be allowed to exercise their option to buy company shares at the original value instead of the current market value. 


Lucy joined a small IT company in February 2021 as a sales consultant. As part of her salary package, she was offered the option to buy shares in the company once she has met specific KPIs. 

Once she had signed eight new contracts and reduced her conversion time to one month from the sales pitch, she would be allowed to buy shares in the IT company through the employee share scheme. 


How Do You Set Up an Employee Share Scheme?

There are a few eligibility criteria that your company will have to meet before setting up an employee share scheme, including: 

  • you need to be an incorporated company in Australia, 
  • you can’t grant shares (or options) to employees who hold more than 10% of the company shares,
  • you can’t grant shares (or options) to employees who control more than 10% of the vote at a general meeting,
  • your company’s turnover must be below $50 million dollars, 
  • shares and options can’t be listed on the public stock exchange, 
  • the share price for ESS options must be at least 85% of the fair market value (in other words, you can’t offer a discount of more than 15%), 
  • you must offer shares to at least 75% of your permanent employees who have completes at least three years of work at your company, and 
  • employees can sell their shares or options when their employment ends or after three years of the grant date. 

Beyond these requirements, you’ll have to meet the ATO’s annual report requirements. So, before implementing your employee share scheme, you’ll need to engage a lawyer to help you set up the ESS agreement and an accountant to help you meet your reporting obligations. 


What Are the Key Benefits of an ESS?

Because an employee share scheme aims to motivate employees to perform at their best for the company they work for, they have various benefits for both parties: 

  • Potentially increased productivity: especially with an options structure, there’s a significant amount of opportunity for increased productivity by the staff. 

And even with the traditional scheme – if employees have a vested interest in the company’s success, then there’s a strong chance of seeing an increase in their motivation to perform. 

  • Tax benefits and concessions: while there are tax consequences for employees (discussed below) regarding discounted shares, the Australian Tax Office offers some tax concessions. For example, if the employee earns less than $180,000 and satisfies the eligibility criteria, they could reduce their assessable income by up to $1,000. 
  • Incentivise without impacting cash flow: for many small businesses and startups, there isn’t much room in the budget to allocate bonus payments as part of an incentive scheme to keep your employees motivated. 

So, by implementing employee share schemes, you can offer an incentive without negatively impacting your business’s cash flow. 

  • Investment opportunity for staff: for many employees, the shares acquired through these share schemes allow them to start their investment portfolio. And many schemes allow investors to avoid brokerage fees, so there’s an ease of entry into the investment market. 


What Are ESS Potential Downsides?

As with any strategy, there are benefits, and there are downsides. Here are a few of the downsides of employee share schemes for both employers and employees: 

  • Falling share prices can have the opposite effect: while the purpose of share schemes is to motivate employees t,o perform, if the share prices fall despite their hard work, then the share scheme could have the opposite effect and end up damaging the morale – so it’s risky to only rely on share schemes as an incentive. 
  • Unlisted shares might not appeal to employees: even if companies aren’t listed on the Australian Stock Exchange, they can still offer employee share schemes. However, unlisted small businesses may find it challenging to use the scheme as an incentive because there’s a possibility that the employees won’t perceive them as highly valuable assets. 
  • Tax consequences for employees: where employees have acquired shares through an option scheme at the original market value, they still have to declare the current market value as part of their assessable income.

So, even though the employee purchased the shares at a discounted price, they’ll have to pay income tax on the total market value of the share. 


Company X issues an employee with shares worth $120,000, but the employee only pays $90,000 for them – this means that the employee received a discount of $30,000.

According to the ATO rules, the employee won’t pay tax on the discount income amount and will be required to include that $30,000 benefit as assessable taxable income in their income tax return.


How Are Share Schemes Taxed for Employees?

According to tax legislation, employee share schemes can be taxed in different ways, including: 

  • Taxed upfront scheme: in a taxed-upfront scheme, the employee is taxed on the discount they receive compared to the market value at the time of acquisition – this is the default tax treatment. 
  • Taxed upfront plus a $1,000 reduction: where an employee has acquired shares under a taxed-upfront scheme and their taxable income is below $180,000, and they meet the general concession requirements; they could qualify for a reduction in assessable income up to $1,000
  • Tax-deferred scheme: according to a tax-deferred scheme, an employee is taxed in the future instead of when they receive the benefit – but there are various types of deferred schemes and specific conditions, so you’ll need to consult an expert tax agent to meet the arrangement conditions. 
  • Start-up concession: employees who purchase under an ESS at a start-up company won’t be taxed until they sell their shares, and if they sell them after 12 months, they’ll be eligible for a 50% capital gains tax discount. 

The employee share scheme tax obligations and concessions can be complex to navigate, so you must seek professional advice from an expert tax agent. 


Key Takeaways 

Employee share schemes are a great way to attract and retain employees for your small business.  They can also be an excellent way for employees to either start up their investment portfolio or diversify their existing investments.

However, as with any scheme or strategy, both employers and employees need to weigh up the proposed benefits and potential downsides to these share schemes, especially regarding the tax implications and concessional tax treatment.

And, employers will need to consider whether they’re going to offer a traditional share scheme or an option-based employee share scheme. 

Whether you’re an employee looking to participate in a share scheme or a small business wanting to implement one, our team of expert accountants and tax agents at Box Advisory Services can give guidance as to what goes into the decision-making process and how to make the most of the arrangement. 

Simply book a FREE consultation with us or give us a call to discuss how we can help you. 



Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to property buyers and investors. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal, tax or investment advice. You should, where necessary, seek your own advice for any legal, tax or investment issues raised in your affairs.
employee share scheme thumbnail