Under the start-up concession, an employee can reduce the taxable discount income relating to their ESS interests to nil. This concession is only available for ESS interests acquired after 30 June 2015.
To be eligible the following conditions must be met:
- the ESS interests you provide are in a start-up company
- your company (which may not be the company issuing the ESS interests) must be an Australian resident taxpayer
- for an ESS interest that is a share – the discount must be no more than 15% of its market value when you provide it
- for an ESS interest that is a right – the amount that must be paid to exercise the right must be greater than or equal to the market value of an ordinary share in the company when you provide the ESS interest
- the scheme is operated so that employees must hold the ESS interests (or any share acquired as a result of exercising the interest) for a minimum of either
- three years
- until your employee ceases employment.
Reducing the minimum holding period
You can make a written request to reduce the minimum holding period. We can allow your request if:
- the intention of the scheme was that all ESS interests acquired were to be held for three years after acquisition
- at the earlier time that we allow, all membership interests in the company were disposed of under an arrangement (for example, as a result of a 100% takeover).
Availability of other schemes
Where an employee acquires ESS interests under the start-up concession, they are also able to acquire ESS interests under another concessional scheme or a non-concessional scheme, if it is offered by their employer.
Example: Start-up company (ESS interests acquired after 30 June 2015)
Ludo's Lounges Pty Ltd is an Australian resident company that has been incorporated for three years and is not listed on any stock exchange. Ludo's Lounges had an annual turnover of $4.2 million in the most recent income year. It does not have a holding company or any subsidiaries but it does have one affiliate, House Upholstery Pty Ltd. House Upholstery had an annual turnover of $1.7 million. Therefore, Ludo's Lounges' aggregated turnover for the 2015 income year was $5.9 million ($4.2 million plus $1.7 million).
As Ludo's Lounges is not listed on any stock exchange, was incorporated less than 10 years before the end of their most recent income year and has an aggregated turnover for that year of less than $50 million, it is a start-up company.
An employee, Sarah, is provided with 2,500 shares in Ludo's Lounges under an ESS that meets the general conditions for concessional tax treatment.
The market value of each Ludo's Lounges share when Sarah acquires them is $1.00. Sarah pays $0.85 per share, which means she has acquired them at a 15% discount ($1.00 – $0.85 = $0.15). Therefore, Sarah's ESS interests will qualify for the start-up concession if she meets her personal conditions. After acquiring the shares, Sarah holds a 1.2% interest in the shareholding and voting rights of the company. Ludo's Lounges advises Sarah that all of the conditions for the start-up concession have been met and provides her with an ESS statement.
Sarah does not need to report an ESS discount amount in relation to the acquisition of the shares in the income year that she acquired the shares. However, under the capital gains tax rules, she will need to report her capital gain or capital loss when she later sells the shares.
End of example