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. Prismi 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 of the group for the most recent income year must be less than $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: neither the company nor any holding company can be listed on a stock exchange, at the time of grant and for the income year in which the interest is provided.
• ·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 shares specifically for the start-up concession — currently LI 2025/19, which replaced LI 2025/16 (itself a short-lived replacement for the earlier ESS 2015/1 from 1 October 2025). Because this instrument has been reissued more than once in quick succession, always confirm the currently registered instrument number on the ATO's ESS safe-harbour valuation methods page before relying on it for a specific grant. Where its conditions are met, a valuation under an approved method is binding on the Commissioner, without needing to separately defend the valuation methodology itself.
• ·Method One (comprehensive method): a full market valuation prepared under generally accepted valuation methodology — earnings-based, market-based or asset-based as appropriate to the entity — carried out or reviewed by a person with appropriate valuation qualifications, consistent with the disclosure and scope requirements CA ANZ, CPA Australia and IPA members work to under APES 225. 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 any liquidation preference payable to preferred shareholders, divided by ordinary and participating shares on issue. Only available where the company has not raised more than $10 million in capital in the 12 months before the valuation date, is either not more than 7 years old or qualifies as a small business entity, and has prepared or intends to prepare a financial report under accounting standards.
• ·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.
• ·Companies that do not fit within either safe harbour (too much capital raised for Method Two, or wanting more certainty than a bare NTA figure for a business with real earnings or IP) commonly commission an independent market valuation prepared to the ATO's Market valuation for tax purposes guidance and the market value basis in IVS 104, applying the willing-but-not-anxious standard from Spencer v The Commonwealth (1907) — this is a valuation-of-choice, not a safe harbour, and needs to be built to withstand review on its own evidence rather than on the instrument's deeming effect.

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. 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 Prismi tier

A start-up in its first priced round, wanting a defensible Method One valuation to support a single option grant round, typically sits in the Comprehensive tier — from $3,995 + GST, 15–25 business days — which supports a documented methodology conclusion with evidence referencing the company's stage, cap table and any recent raise. Where the company is pre-revenue or genuinely asset-light and qualifies for Method Two, a lighter-touch engagement can sometimes fit the Essential tier — from $1,495 + GST, 10–14 business days — but only where the NTA calculation itself is straightforward and the eligibility caps are clearly met; we confirm this at intake rather than assuming it. Companies running an ongoing ESOP with periodic grants, multiple share classes, or a valuation likely to be scrutinised alongside a Division 7A or restructure question at the same time, are usually better served by the Defensible Valuation File (from $8,995 + GST, 25–35 business days), which builds a working file designed to be reused and refreshed for successive grant rounds rather than commissioned fresh each time.