What do I need to provide to my employees, and to the ATO, if we’ve issued them options / shares?

Employee Share Scheme (ESS) / Employee Share Option Plan (ESOP) reporting obligations: companies have an annual reporting obligation to both their employees and to the ATO

Background

Where a Employee Share Scheme (ESS) / Employee Share Option Plan (ESOP) has been implemented, companies have an annual reporting obligation to both their employees and to the ATO.  There’s more information up on the ATO website including for different circumstances like taxed-upfront and taxed-deferred schemes but for the most common scenario where startups that are eligible for the startup concession are issuing options to their employees here’s some summary information:

Subject to meeting startup concession eligibility criteria, startups are able to offer their employees an often quite discounted value to typically acquire options (as opposed to shares) in their startup.

It is expected that these options will eventually be exercised into full shares, often in / around an exit, subject to Shareholders Agreements and Employee Share Option Plan agreements.  The difference between the option exercise price and any exit price for the shares is subject to capital gains tax (CGT).  The exercise price of the options is used to determine the cost base for calculating CGT.  This information, therefore, needs to be tracked and reported to employees and the ATO.

Reporting 

Employers must:

  • Provide their employees an ESS statement by 14 July (alongside other EOFY payroll reporting obligations); and
  • Provide the ATO a ESS company report by 14 August

The information that is provided to employees and the ATO is:

  • number of ESS “interests” (ie options) acquired
  • market value of the options acquired
  • exercise price of the options that (or acquisition price if issuing shares)
  • acquisition date of the options

In practice:

  • most ESOPs have vesting periods over 3 or 4 years during which employees progressively receive their full entitlements.  This means that, each year, companies must report to their employees and the ATO including a determination / estimate of the prevailing market value (often based on the last raise where there has been one)
  • each time new (rounds of) employees are offered ESOPs companies will need to determine the, then applicable, exercise price for those employees.  The exercise price offered to those employees remains current … for those employees … across multiple vesting periods while, over time, the prevailing market value may change

How do I lodge with the ATO?

You can lodge this information yourself via the ATO’s business portal, or via your tax agent.

More information