Two separate regimes govern an ESOP, and most of the confusion comes from treating them as one.
An Australian company setting up an employee share scheme has to satisfy two bodies of law that have nothing to do with each other. The Corporations Act governs whether you are allowed to make the offer at all and what you must hand over when you do. The Income Tax Assessment Act governs when the employee pays tax and on what. They have different thresholds, different tests and different commencement dates, and an ESOP can comply with one and fail the other.
Both changed materially in 2022. A great deal of what is written about Australian employee share schemes online predates those changes and is now wrong in ways that matter.
This is general information, not advice. CatenaHQ is software. Nothing on this page is legal, financial, tax or investment advice, and it does not take account of your circumstances. The thresholds and dates below are current as at October 2026; tax law and the Corporations Act change. Get your own advice before you issue anything.
Offering securities to employees is still an offer of securities. Before October 2022 most unlisted companies relied on narrow relief that capped participation at $5,000 per person per year, which was far too small to matter for a startup. A dedicated employee share scheme regime now sits in Division 1A of Part 7.12 of the Corporations Act 2001 (Cth), in force from 1 October 2022. An offer made under it must say that it is made under that Division.
For an unlisted company running a scheme where participants pay something, the cap is $30,000 per participant in any 12-month period, plus 70% of dividends and 70% of cash bonuses received in that year.
Amounts payable on exercise count toward the cap. Amounts payable only during a liquidity period do not.
A separate ceiling limits the scheme itself: 20% of the company's issued capital for an unlisted company, measured over three years. For a listed company it is 5%.
This is the number that should be driving your option pool planning, and it is the one founders discover late.
For an unlisted company running a paid scheme, participants must receive disclosure 14 days before the offer, and again before an option or incentive right is exercised:
financial statements prepared under the accounting standards, a valuation of the interests, and a statement that the company is solvent.
The disclosure obligation is the part that turns an ESOP from a document into an ongoing process. Every exercise event triggers it again, which means the valuation and the accounts have to be current and findable, not reconstructed from memory two years later.
Employee share scheme interests are taxed under Division 83A of the Income Tax Assessment Act 1997. The default is unhelpful for a startup: the discount an employee receives is assessable income in the year they acquire the interest, which can tax somebody on paper value they cannot sell. The start-up concession exists to avoid exactly that, and it is the reason most Australian startup ESOPs are structured the way they are.
To use it, the company must meet all four of these:
Then the interests themselves have to qualify, and shares and options are treated differently:
The discount cannot be more than 15% of market value at the grant date. Issue shares at a bigger discount than that and the concession is gone.
The exercise price cannot be below the market value of an ordinary share at the grant date. Start-ups may use the net tangible asset valuation method, which for an early company can produce a very low exercise price legitimately.
In both cases the interests must be held for at least three years from acquisition, or until the employee leaves, whichever comes first. Where the concession applies, the discount is not taxed as income at all and the employee is instead taxed under the capital gains rules when they eventually sell.
For employment ending on or after 1 July 2022, ceasing employment is no longer a deferred taxing point. Under the old rules, an employee who left a company holding deferred ESS interests could be taxed at that moment — on illiquid equity in a private company, with no sale and no cash to pay the bill. That trap is gone.
This is the single most common out-of-date statement in Australian ESOP content, and it changes real decisions: whether a departing employee should exercise, how long a post-termination exercise window needs to be, and whether good-leaver provisions are doing what their drafter intended. Where tax is deferred, the maximum deferral is 15 years from acquisition.
The $30,000 participation cap is a Corporations Act number. The $50 million turnover test is a tax number. Satisfying one says nothing about the other.
The issue cap for an unlisted company is 20% over three years. A pool sized on a US template can breach it.
The start-up concession stops being available once the company passes ten years from incorporation. Companies that have pivoted through an older shell entity are often further through that clock than the founders think.
The share discount and the option exercise price are both measured against market value at the grant date. A valuation reconstructed afterwards is the weakest possible evidence, and the disclosure rules require one anyway.
Options, unissued pool and issued shares are different things. A cap table that blends them misstates everybody's ownership and will be rebuilt line by line in due diligence.
Grant dates, exercise prices, vesting, valuations and the disclosure given at each offer all have to be produced years later. That is a register problem, not a document problem.
CatenaHQ carries ESOP grants on the same cap table as issued shares, so the pool, the grants, the vesting and the fully diluted position are one record rather than a spreadsheet that has to be reconciled. Grant dates, exercise prices and valuations stay attached to the grant, which is what the disclosure obligation and any later due diligence both ask for.
The useful test of any ESOP record is simple: three years from now, can you show who was granted what, on what date, at what price, against what valuation, and what they were given when the offer was made? If that answer lives in an inbox, it is not a record.
Tracking option grants and their vesting alongside the register is what the cap table and share register module is for.
All of the CatenaHQ guides are written the same way: from the Act and the regulations, with the section numbers shown.
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