Employee Share Schemes (ESS) Australia 2025–26: What You Need to Know at Tax Time

If your employer has offered you shares, options, or rights to buy shares as part of your remuneration package, you’ve participated in an Employee Share Scheme (ESS). These arrangements are increasingly common across Australian businesses — from ASX-listed companies to fast-growing start-ups — and they come with specific tax obligations that many employees overlook.

Getting your ESS reporting right can save you from unexpected tax bills, penalties, and ATO scrutiny. Here’s what you need to know for the 2025–26 income year.

What Is an Employee Share Scheme?

An ESS is an arrangement where an employee receives shares, stapled securities, or rights (including options) to acquire shares in their employer’s company — usually at a discount to market value — because of their employment.

The “discount” — the difference between what you paid and the market value — is the amount the ATO is interested in. That discount is treated as employment income, not a gift, and must be reported in your tax return.

ESS interests can include:

• Shares issued directly to employees
• Options giving the right to buy shares at a set price
• Rights to acquire shares at a future date
• Stapled securities in listed trusts or groups

The Two Tax Pathways: Upfront vs. Deferred

The most important thing to understand about ESS taxation is when you’re taxed. There are two main pathways:

1. Taxed Upfront

Under a taxed-upfront scheme, the discount is included in your assessable income in the year you acquire the shares or rights — even if you can’t sell them yet.

Key point: You may be eligible to reduce your assessable ESS discount by up to $1,000 if:

• The scheme qualifies as an eligible taxed-upfront scheme, and
• Your adjusted taxable income (including the ESS discount) is $180,000 or less

The income test includes reportable fringe benefits, reportable employer super contributions, net investment losses, and net rental property losses.

2. Tax Deferred

Under a tax-deferred scheme, you don’t pay tax when you receive the shares or options. Instead, tax is triggered at a “deferred taxing point” — typically the earliest of:

• When there’s no longer a real risk of forfeiture and no genuine disposal restriction
• When you exercise your options (for rights/options)
• The long-stop date (generally 15 years after acquisition for interests acquired from 1 July 2015)

Important 2022 reform: If you left your employer on or after 1 July 2022, ceasing employment is no longer a deferred taxing point. This means changing jobs won’t automatically trigger a tax bill on unvested shares or options — a significant improvement for employees who move between roles.

The Start-Up Concession: A Major Tax Break

If you work for a qualifying start-up company, a special concession may apply that removes the ESS discount from ordinary income tax treatment entirely.

Under the start-up concession:

• The discount is not taxed as employment income
• You don’t report it in the ESS section of your tax return
• Instead, any gain is dealt with under Capital Gains Tax (CGT) rules when you eventually sell

To qualify, the company must meet specific criteria (including being unlisted, incorporated for less than 10 years, and having aggregated turnover under $50 million), and the shares or options must be issued at no more than a small permitted discount with a minimum three-year holding period.

This concession is particularly valuable for start-up employees who receive options as part of their compensation — it can significantly reduce the overall tax burden.

The 30-Day Disposal Rule

Watch out for this one. If you sell your ESS interest (or the underlying shares from exercised options) within 30 days of the deferred taxing point, the disposal date becomes the new deferred taxing point.

This can:

• Change the amount you’re taxed on
• Shift the income into a different financial year
• Require your employer to issue an amended ESS statement

If you’re planning to sell shares shortly after vesting or exercising options, check the timing carefully — or speak to a tax adviser first.

What Employers Must Do: Reporting Obligations

Employers who provide ESS interests have strict reporting obligations:

ESS Statement to Employees

For the 2025–26 year, employers were required to provide each participating employee with an ESS statement by 14 July 2026. This statement details the taxable discount amounts, deferred taxing points, and any start-up concession information.

If an error is discovered, an amended statement must be provided within 30 days.

ESS Annual Report to the ATO

The ESS annual report for 2025–26 was due to the ATO by 14 August 2026 and must be lodged electronically. Employers with 50 or fewer employees and up to three schemes per employee can use the ATO’s online form; larger employers use File Transfer.

Common employer mistakes to avoid:

• Using an employee’s TFN as the reporting identifier (not permitted)
• Aggregating share issues with different acquisition dates into one record
• Reporting an incorrect deferred taxing point
• Missing the 14 July or 14 August deadlines

How to Report ESS in Your 2025–26 Tax Return

If you received an ESS statement, here’s what to do:

1. Collect all ESS statements — including any amended versions
2. Check ATO prefill — ESS amounts may prefill into your return, but always verify against your actual statements
3. Report at Question 12 of your individual tax return, distinguishing between taxed-upfront amounts (eligible or ineligible for the $1,000 reduction) and tax-deferred amounts where a taxing point occurred in 2025–26
4. Do not report qualifying start-up concession discounts in the ESS section
5. Apply the $1,000 reduction if you meet the income test
6. Check the 30-day rule if you sold interests close to a taxing point
7. Consider CGT separately — selling ESS interests after the taxing event may trigger a separate CGT liability

Common Mistakes That Attract ATO Attention

The ATO actively reviews ESS reporting and has identified these frequent errors:

• Relying solely on prefill without checking the underlying ESS statement
• Reporting an acquisition when the amount was actually deferred
• Missing a deferred taxing point caused by vesting, exercise, or removal of restrictions
• Incorrectly treating employment cessation as a taxing point (this no longer applies for departures from 1 July 2022)
• Claiming the $1,000 reduction without satisfying the income test
• Reporting start-up concession discounts in the ESS section (they belong in CGT)
• Forgetting CGT when shares are eventually sold

Record Keeping: Don’t Throw Anything Away

ESS interests can span multiple years, and you may need records long after the initial tax event. Keep:

• All ESS statements (including amended ones) for at least 5 years after assessment
• Grant notices, vesting schedules, and scheme rules
• Exercise confirmations and disposal records
• Market value information at key dates

If you hold start-up concession interests, you’ll need these records to calculate your CGT when you eventually sell — potentially years down the track.

Sources

• ATO: Employee share schemes
• ATO: ESS — Tax treatment
• ATO: ESS — Start-up concession
• ATO: ESS — Employer reporting
• Treasury: Employee Share Schemes

Get Expert Help with Your ESS Tax Obligations

Employee Share Schemes can be complex — especially when you’re dealing with multiple grants, different vesting dates, or a mix of upfront and deferred schemes. Getting it wrong can mean paying too much tax, or not enough — both of which create problems down the track.

TaxServe Australia’s experienced tax professionals can help you:

• Understand your ESS tax obligations
• Correctly report ESS amounts in your tax return
• Maximise available concessions (including the $1,000 reduction and start-up concession)
• Plan for CGT when you sell your shares
• Ensure your employer’s ESS reporting is accurate and on time

Contact TaxServe Australia today for a consultation with one of our tax experts. We make complex tax simple.