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Survey reveals employee share option plans are a barrier to innovation in Australia


19 March 2013: A new survey conducted by Deloitte Australia and international legal practice Norton Rose has found the tax consequences of issuing share options to employees are so burdensome that, although 94% of companies think employee share options are a valuable way to incentivise employees, only around one in three companies (37%) had actually issued share options in the last three years.

Employee Share Option Plans (ESOPs) are widely regarded as a way for fast growth companies, typically short of revenue and capital, to incentivise employees by providing them with shares in the business. However, in Australia 81% of those surveyed, agreed that tax reasons were the main consideration for their reluctance to utilise ESOPs. Seventy-five percent of those reluctant to utilise ESOPs, went on to say that ‘to a great extent’ the complexity of establishing the plans was a further disincentive to issuing share options.

Roan Fryer, Deloitte Tax partner, said, “Employee share options are a flexible and low-cost way for fast growth businesses to compensate, attract and retain high-performing talent who can be the difference between a garden shed business and a household name.”

Fryer continued, “However, the associated tax rules here in Australia make them difficult and expensive to use, in contrast to other jurisdictions such as the USA and UK, where concessional taxation treatment of certain ESOPs (such as the deferral of the taxing point) have allowed businesses to effectively leverage ESOPs, resulting in greater employee participation in ESOPs and, ultimately, staff retention.

“There is a clear opportunity for business to work with policy-makers to improve the current situation, where ESOPs are left in the ‘too-hard bucket’ and help transform them from a barrier into an enabler of innovation,” he said.

The survey shows the appetite for ESOPs remains strong. The vast majority (89%) of respondents stated that they would be more inclined to issue share options, if employees were taxed on financial gains at the time of receipt of the ESOP proceeds rather than earlier, as is currently the case in Australia.

Nick Abrahams, Asia Pacific head of the technology practice at Norton Rose, said, “Deloitte and Norton Rose have been talking to relevant stakeholders in government to try to get the ESOP rules changed to help Australian companies. We did the survey to show empirically to government that this is a real issue for our country. We think it is capable of a solution and we are hopeful the government will act to change the laws now.”

Abrahams said “It is through employee share options that employers can truly incentivise their staff to perform. For the technology industry, and in particular for fast growth companies, this isn’t just an innovation issue but a competition issue.

“As a nation we risk losing valuable companies to friendlier jurisdictions that offer greater flexibility and make it easier to reach a larger scale,” said Abrahams.

ESOP overseas

In the UK, certain employee share options are taxed when the option is exercised. That is, gains are taxable in the year when the individual exercised the ESOP – not when the option was originally granted. The ESOP (when exercised) is taxed under Capital Gains Tax provisions less the annual exemption.

In the U.S., share options can be either qualified or non-qualified. Qualified incentive share options are limited to $100,000 being exercised each year for any one employee, while the recipient must be an employee of the company from the time the option is granted until at least three months prior to exercising the option. Similarly in the UK, the qualified options are taxed in the year that they are sold.

There is no statutory limitation on the amount of non-qualified options. They can be offered to anyone who ‘provides services’ to the company (i.e. the board of directors and independent contractors may also receive these options). They too are taxed in the year the option is exercised. 

This joint Deloitte/Norton Rose survey was designed to help gain an understanding of the Australian technology community’s view of the value and complexity of employee share option plans in incentivising employees. It was conducted in January and February 2013 and included the responses of 104 businesses from fast growth to established companies.

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Johnny Sollitt-Davis
Deloitte Australia
Job Title:
Corporate Affairs & Communications
Tel: +61 3 9671 6177, Mobile: 0431 134 850
Samantha Magnusson
Norton Rose
Job Title:
Corporate Communications Senior Manager
Tel: +61 2 9330 8138; Mob: +61 423 116 696




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