On $42,500 in proceeds from a startup acquisition, Tony paid an effective 17% tax rate. A salaried employee receiving the same amount as income would have paid closer to 33%. That gap is not a loophole. It is the Australian start-up concession working exactly as designed.
This is Part 2 of a three-part series on Australian startup equity. Part 1 covers the mechanics: what options are, how vesting works, dilution, and leaver provisions. Part 3 covers the expected value maths and negotiation. This article covers tax, and if you’ve been dreading it, the news is better than you expect.
Start with the maths, not the legislation
Tony receives 1,700 options with a $2.00 exercise price. He pays nothing at grant. Two years later he exercises, paying $3,400 in total, and receives 1,700 shares. The company gets acquired. He sells at $25 per share, receiving $42,500.
His capital gain: $42,500 minus $3,400 = $39,100. The 50% CGT discount applies, leaving a taxable gain of $19,550. At a 37% marginal rate, that’s roughly $7,234 in tax. On $42,500 in proceeds, his effective rate is about 17%.
Tony received equity worth $39,100 in gains and handed over $7,234 to the ATO. A salaried employee earning the same $39,100 as employment income would pay closer to $14,000 in income tax.
The legislation behind this is Division 83A-C of the Income Tax Assessment Act 1997. The core principle is not complicated: under the start-up concession, your options are taxed as a capital gain when you sell, not as income when you receive them.
The four taxing points, and the three that don’t fire
Most employees assume they’ll get a tax bill when their options vest, when they exercise, or when the company hits a milestone. Under the start-up concession, none of those events trigger tax. There are four potential taxing points, and only one matters:
- Grant: Nothing. No tax event.
- Vesting: Nothing. No tax event.
- Exercise: Nothing. You pay the strike price and receive shares. No income tax.
- Disposal (when you sell): CGT applies. This is the only taxing point.
The CGT calculation is this: proceeds minus cost base. Your cost base is the exercise price you paid. Not the market value of the shares at exercise. Just the cash you handed over. If you held the options for more than 12 months from the original grant date, the 50% CGT discount applies.
That last point matters: the holding period runs from grant date, not exercise date. This is the backdating rule under the concession. An employee who received options two years ago can exercise and sell immediately on an acquisition or IPO and still get the 50% discount, because the grant was more than 12 months ago.
Who qualifies
The start-up concession is not available to everyone. Both the company and the specific options must meet criteria, confirmed by ATO eligibility guidance and Axe Legal’s ESS analysis.
The company must be unlisted, incorporated less than 10 years before the end of the most recent income year prior to grant, an Australian tax resident, carrying aggregated turnover below $50 million in the year before grant, and not a share trader or investment company.
The options must be over ordinary class shares, not preference shares. The exercise price must be at or above the market value of ordinary shares at grant date — options cannot be granted in the money and still qualify. They must carry a minimum 3-year holding restriction from grant date, and leave the employee holding fewer than 10% of the company’s issued ordinary shares.
If the company meets these criteria and the options were structured correctly, the concession applies automatically. You do not need to apply for it or declare it at grant.
What the 2022 reforms changed
Two separate reforms landed in 2022. They affect different parts of the ESS landscape — it’s worth understanding which one applies to you.
The tax reform (1 July 2022): Before this date, leaving your employer could trigger an immediate tax event under ordinary tax-deferred ESS schemes — a bill on paper gains you couldn’t cash out yet. Employees made redundant or resigning often received tax assessments on shares they couldn’t sell. The Treasury Laws Amendment Act removed cessation of employment as a taxing point for those ordinary deferred schemes. The taxing point for non-concession plans is now when restrictions lift and forfeiture risk ends, or after 15 years from acquisition. It applies to existing interests that hadn’t yet triggered a taxing point as of 1 July 2022.
If you hold options under the start-up concession, this reform does not directly affect you — but it confirms something important: you were already protected. Under the concession, there was never an income tax event at vesting or exercise to begin with. The phantom income problem simply doesn’t exist in the concession framework. The reform fixed a problem for employees at companies that don’t qualify for the concession (larger, older, or listed companies).
The Corporations Act reform (1 October 2022): A separate change removed prospectus requirements for ESS offers to employees and simplified the rules for unlisted companies. The reform introduced a $30,000 annual cap — but this is a cap on the cash consideration an employee pays (i.e., exercise price payments), not on the value of options a company can grant. If options are granted for $0 upfront — which is standard for most Australian startups using the concession — there is no cap on the grant size. The cap only constrains how much cash the employee can hand over to exercise in any 12-month period under the streamlined disclosure rules, with a five-year accrual ceiling of $150,000.
The two worlds of Australian ESS
Because employees at both qualifying startups and larger companies often end up in the same conversation, here is the full comparison:
| Start-up concession | Standard tax-deferred scheme (late-stage / listed) | |
|---|---|---|
| Tax at vesting / exercise | None | Ordinary income tax at full marginal rate |
| Tax at disposal | CGT only | CGT on growth after the taxing point |
| 50% CGT discount clock | Starts at grant date | Starts at the deferred taxing / exercise date |
| Leaving the company | No tax event | No tax event (post-2022), but 15-year clock ticking |
One edge case worth knowing: if your startup grows out of the concession criteria during your tenure — crosses $50M in turnover, reaches its 10-year mark, or lists on an exchange — options granted before that threshold still qualify under the concession, because eligibility is assessed at the time of grant. Options granted after the company crosses the threshold do not.
When the concession doesn’t apply
RSUs do not qualify. Restricted Stock Units vest as shares directly, with no exercise price. The ATO treats the full market value of the shares at vesting as employment income, taxed at your marginal rate. For an employee at a $200K package vesting $50K in RSUs, that is a $50K addition to assessable income in that financial year, before any capital gain on future growth. RSUs are rare at Australian early-stage startups for exactly this reason: the tax treatment is materially worse than options under the concession.
Late-stage and listed companies are also out. If your employer has operated for more than 10 years, has turnover above $50 million, or is listed, the concession is unavailable. Your options fall under the general Division 83A deferred scheme. When restrictions lift (typically vesting), the difference between market value and exercise price is treated as ordinary employment income at your full marginal rate. There is no 50% CGT discount on that component.
Why your startup seems stingy with options
This is an employer cost, not an employee tax, but it explains something candidates often notice.
State payroll tax (4% to 6.85% depending on the state) applies to ESS grants. It is a real cash cost the company must fund when it issues options. A startup granting $1 million in options may owe $50,000 to $70,000 in payroll tax on those grants. That comes out of runway.
The valuation gap makes it worse. For income tax purposes, startups can use the Net Tangible Asset (NTA) method, which for an asset-light SaaS company often produces near-zero valuations, keeping both strike prices and payroll tax minimal. Victoria is the only state that accepts NTA for payroll tax purposes. In New South Wales, Queensland, and everywhere else, the revenue office requires market-based valuations, which can generate unexpectedly large payroll tax bills on the same grant.
Founders managing the ESOP budget are balancing this real cost against what they want to give employees. It is not always stinginess.
What you file
The company must issue ESS statements to every affected employee by 14 July each year, and lodge an ESS annual report with the ATO by 14 August.
As an employee holding options under the start-up concession, you report nothing in your tax return until you sell. When you do, you report the capital gain in the CGT section of your individual return. If you haven’t exercised or sold, there is nothing to declare.
PAYG withholding does not generally apply to start-up concession options, because there is no income tax event until disposal. If you have not provided your TFN to your employer, the company must withhold at the top marginal rate from any payment, but that withholding cannot exceed 50% of the discount.
The short version
Australia’s tax treatment of startup options is, by global standards, good. Under the start-up concession you pay CGT at your marginal rate on half the gain, and only when you actually sell. You pay no income tax when options vest. You pay nothing when you exercise. You do not get a phantom income bill if you leave.
The concession has real limits. It does not help RSU holders. It does not help employees at large or listed companies. And the employment cessation reform is only three years old.
Part 3 covers the expected value maths: given these tax terms, when does the equity actually make sense to take, and what are you negotiating when you ask for more.
If you’re a founder designing an ESOP or an employee evaluating an offer, talk to us.
This article is general information only and does not constitute financial, tax, or legal advice. Australian tax law is complex and individual circumstances vary. Consult a registered tax adviser before making decisions about your equity or tax position.
Sources:
- ATO: Start-up concession (Division 83A-C)
- ATO: Key ESS changes in detail (2022 reforms)
- Bluerock: ESS start-up concessions in action — case study (Tony example)
- Axe Legal: ESS start-up concession guide
- Pitcher Partners: Cessation of employment removed as taxing point
- Pitcher Partners: Employee share schemes and payroll tax