iscoverEmployers and employees have been warned of the significant tax implications associated with employee share schemes as they gain popularity in workplaces.
ESS tax implications could cost employers, employees, HLB warns
18 July 2025
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8 minute read
HLB Mann Judd is cautioning employers and employees on employee share schemes (ESS) as they can carry significant tax implications, depending on the scheme structure.
ESS have become a popular incentive in Australian workplaces as they allow employees to benefit from business success and could be an effective tool for staff retention and wealth creation for employers.
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Peter Bardos, partner at HLB Mann Judd Sydney, said while this incentive appeared worthwhile, it was important to consider the varying tax treatment and implications.
“Typically, they fall into three categories: taxed-upfront schemes, tax-deferred schemes and start-up concessions,” Bardos said.
“Many employees don’t realise that the discount they receive on the shares issued from the scheme is often treated as taxable income upfront, which can create cash flow challenges. This is particularly relevant for standard employee share purchase plans where shares are offered below market value.”
A major risk noted by Bardos, often associated with ESS, was that employees lacked an understanding of the “fundamental principles”, including how funds would be sold in the future if the shares weren’t listed on a stock exchange, as well as many involved options instead of shares and loan arrangements.
According to Bardos, HLB had seen “unfortunate cases” where employees had held shares that had become worthless, reinforcing that any shares should be considered as any other investment and form part of a balanced investment approach.
Some schemes qualified for deferred tax treatment where the tax point was delayed until certain conditions were met, such as the lifting of sale restrictions.
Yet, this deferral could lead to larger tax bills down the track if share values had increased.
Bardos said special tax concessions could apply to unlisted Australian startups that were less than 10 years old and had a turnover of less than $50 million, but only where eligible employees could avoid having discounted shares assessed as taxable income.
“The main benefit of the startup concession is that employees are not assessed on any discount and will usually only pay tax on a future sale. This allows alignment of the cash benefit and tax payment as well as a lower rate of tax where the ESS is held for more than 12 months.”
“The tax implications become even more complex for employees of multinational companies, where cross-border rules and foreign tax arrangements may create additional Australian tax obligations.”
In an article written by Susannah Batley, Sharesies Business general manager, similar sentiments were shared as she said true value only emerged from ESS when both employees and administrators were served, making it a worthwhile investment.
“Employee share schemes are one of the smartest ways to help improve engagement and alignment – but to get results, they must effectively serve two user groups with different needs and objectives,” she said.
“To be viable and meaningful, schemes should not only be motivating for employees, but also practical for the administrative teams who implement them.
Bardos added that based on these implications, employers and employees needed to carefully consider the tax consequences when implementing or participating in share schemes, or alternatively, seek professional advice.
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