The ESS start-up concession is the most generous equity tax treatment in Australia, and it stands or falls on valuation.

The ESS start-up concession (Subdivision 83A-C) lets eligible companies issue shares at up to a 15% discount tax-free, or options with no upfront tax if the exercise price sits at or above market value. Eligibility turns on company-age and turnover tests plus a defensible market value, set using an ATO safe-harbour method or an equivalent valuation. Oliver Group prepares that valuation evidence: get it wrong and the concession can unwind.

Why the valuation is the concession

The ESS start-up concession (Subdivision 83A-C, ITAA 1997) is attractive because it removes the upfront income tax that would otherwise apply when an employee receives shares or options at a discount. For options, there is no upfront taxing point at all provided the exercise price is set at or above the market value of an ordinary share at grant. For shares, any discount up to 15% of market value is tax-free upfront, with the balance taxed only on eventual sale as a capital gain (with the CGT discount available if held over 12 months). Every part of that outcome depends on one number: what was the market value of an ordinary share on the day the ESS interest was provided. If that figure cannot be substantiated, the ATO can treat the exercise price as below market value or the discount as exceeding 15%, which pushes the arrangement out of the start-up concession and into ordinary ESS taxing rules: often at the worst possible time, on audit, years after the shares have moved in value.

Eligibility tests at the time of grant

• ·Company age: the company (and connected/affiliate entities in the aggregated group) must have been incorporated for less than 10 years, tested as at the end of the most recent income year before the ESS interest was provided.
• ·Aggregated turnover: aggregated turnover for the most recent income year before the interest was acquired must not exceed $50 million. If turnover crossed $50 million in the prior year, grants made in the current year fall outside the concession even if earlier grants remain covered.
• ·Unlisted: no equity interests in the company, its subsidiaries, any holding company or that holding company's subsidiaries may be listed on an approved stock exchange at the end of the company's most recent income year before the interest was acquired.
• ·Resident company: the employer (or the relevant group entity issuing the interest) must be an Australian resident taxpayer.
• ·Genuine employment relationship and minimum holding period: the employee must hold the ESS interest for at least three years (or until earlier cessation of employment) for the concession to remain available on that interest.
• ·These thresholds move and the ATO periodically updates guidance: confirm the current turnover and age figures against the ATO's employee share scheme pages before relying on them for a specific grant date.

The 15% discount cap and the exercise-price rule

For shares, the tax-free discount is capped at 15% of the share's market value at the time it is provided: a company cannot issue shares at, say, a 30% discount and only tax half of it concessionally; the entire arrangement needs the discount to sit at or under the cap, tested against a defensible market value. For options (rights to acquire shares), the concession works differently: there is no discount cap as such, but the exercise price must be set at or above the market value of an ordinary share at the time the option is granted. Set the strike below market value and the option loses the start-up concession's no-upfront-tax treatment; in some structures it can also trigger fringe benefits or other consequences depending on how the scheme is structured. In both cases, the market value used to set the discount or the strike is the load-bearing figure, and it needs to be capable of being reproduced and defended years later.

Safe harbour valuation methods: Method One and Method Two

• ·A legislative instrument sets out two approved safe harbour methods for valuing unlisted ordinary shares specifically for the start-up concession: LI 2025/19, which commenced on 1 October 2025 and repealed the 2015 approval (ESS 2015/1) that had applied since 1 July 2015. Where its conditions are met, a value worked out under an approved method is binding on the Commissioner for the concession's market value test in s 83A-33(5) only: it does not settle market value for any other tax purpose. Confirm on the ATO's ESS safe-harbour valuation methods page that the instrument is still in force before relying on it for a specific grant.
• ·Method One (comprehensive method): a written valuation worked out by the company's chief financial officer or a suitable valuer, meaning a person with the skill, knowledge and experience to value unlisted shares, who need not be independent of the company. It must take into account, on a reasonable basis, the value of the company's tangible and intangible assets, the market value of similar businesses (including earnings multiples), uplifts and discounts for control premiums, lack of marketability and key person risk, and the present value of anticipated future cash flows. The directors must endorse both the methodology and the value by written resolution. This is the method most companies with any trading history, revenue, IP value or external funding rounds need, because NTA alone will materially understate a growing business.
• ·Method Two (net tangible assets method): a simplified calculation: net tangible assets, less the amount needed to discharge the company's obligations on its preference shares, divided by the ordinary shares plus any preference shares that participate with them in residual assets on a winding up. Only available where the company has not raised more than $10 million in capital (debt, equity or both) in the 12 months before the valuation date, has either been incorporated for not more than 7 years or is a small business entity, and has prepared or will prepare a financial report for the year of the valuation.
• ·Both safe harbour methods also require that, at the time of valuation, the directors reasonably anticipate no change of control in the six months after the interests are provided: a valuation obtained just before a sale process starts, or one no longer consistent with a deal in train, does not satisfy this condition even if the underlying calculation is correct.
• ·A company may also use another method. Under section 6(2) of the instrument, that method is itself approved if the general conditions are met and it produces a value not less than the value an approved method available to the company would produce. Otherwise, and for any company outside the general conditions (for example, where a change of control is anticipated within six months), market value is established under ordinary principles: the ATO's Market valuation for tax purposes guidance and the willing-but-not-anxious standard from Spencer v The Commonwealth (1907). That valuation has no deeming effect and needs to be built to withstand review on its own evidence.

Board documentation and timing relative to grant date

The valuation date needs to sit before or on the date the ESS interest is provided, not after. Boards should resolve the grant, set the exercise price or discount by reference to the valuation, and document the sequence: valuation obtained, board minute approving the offer referencing the valuation, offer documents issued to employees, interests provided. Where Method One is relied on, the directors' written resolution endorsing the methodology and the value is a condition of the safe harbour itself, so it belongs in that sequence. A valuation obtained after the raise or after the grant, or a valuation that predates a material event (a funding round, a large new contract, a materially changed forecast) without being refreshed, is the most common way start-up concession claims unwind under later review: the ATO's focus is not just on the method chosen but on whether the value used was actually current and reasonable at the moment the interest was provided.

The comparison case: non-concession schemes and the deferred taxing point

Where the start-up concession does not apply, company too old, turnover too high, listed, or the discount/exercise price test fails, the ESS interest falls into the ordinary tax-deferred scheme rules instead. Under those rules, tax is deferred (not eliminated) to the earliest of: the point there is no real risk of forfeiture and no genuine disposal restriction remains, or 15 years after acquisition. Cessation of employment is no longer itself a deferred taxing point for interests where employment ends on or after 1 July 2022. This is a materially worse outcome for the employee than the start-up concession, deferral rather than exemption, and a taxing point the company does not fully control the timing of, which is why eligibility and valuation are checked before grant, not discovered afterwards.

Matching the valuation to the right Oliver Group package

Oliver Group's fees are set by the annual turnover of the business: a Small Business Valuation is $1,495 + GST for turnover under $2 million, a Medium Business Valuation is $2,495 + GST for turnover between $2 million and $10 million, and a Large Business Valuation is $3,495 + GST for turnover over $10 million. Small-business reports are delivered in 2 business days and medium-business reports in 3 business days; the delivery date for a Large Business Valuation is agreed before commencement. Delivery time starts once payment and all required information have been received. Retrospective valuation dates are +$495 each and additional entities are +$795 each. The fee is fixed in writing before work begins and never depends on the concluded value.