Employee share scheme drafting workflow
An ESS must work at three layers — the plan rules (long-term, stable), the offer (fit for each grant), and tax (start-up concession vs deferred taxing point). The Corporations Act 2001 (Cth) Division 1A relief is only available where the offer fits the statutory template, so the plan has to be drafted to sit within the relief, not outside it.
This is an 8-step workflow for drafting an employee share scheme (ESS) or employee option plan for an Australian private company. It covers plan rules, offer documents, Division 1A disclosure relief, and start-up or deferred taxation under Division 83A of the ITAA 1997.
Before you start
- Signed costs agreement and conflict check
- Instructions on eligibility, equity pool size, and vesting
- Company constitution and shareholders agreement
- Tax advice on start-up concession vs deferred taxing point
The workflow
Agree commercial design
Agree eligibility (employees, directors, contractors), equity pool size, instrument (shares, options, rights), vesting, exercise price, leaver treatment, and change-of-control mechanics.
Check tax concession eligibility
Test the ESS against the start-up concession (Subdiv 83A-E) and the deferred taxing point rules. Advise the company in writing on eligibility and any annual reporting obligations.
Apply Chapter 6D and Division 1A relief
Map the proposed offers to the Division 1A ESS disclosure relief criteria — eligible participant, issuer cap, offer cap, and required statements. Where Division 1A is unavailable, consider s 708 exemptions.
Draft the plan rules
Draft plan rules covering grant, vesting, exercise, leaver categories, change of control, forfeiture, clawback, adjustments on reorganisations, and amendment power.
Draft the offer and acceptance documents
Draft the offer letter, acceptance form, and prescribed statements under Division 1A. Ensure language on risk, price, and restrictions is plain English and Division 1A-compliant.
Amend constitution and shareholders agreement
Where required, amend the constitution to permit the issue of the specific instrument (for example, unpaid options, non-voting rights) and update the shareholders agreement to carve out ESS participants from pre-emptive rights.
Obtain board and shareholder approvals
Pass the board resolution adopting the plan and the shareholder resolution authorising any required share issue. Document ASIC filings and any related party approval under Chapter 2E if relevant.
Implement ongoing reporting and admin
Implement ATO ESS annual reporting, update the cap table on grants and exercises, and establish an annual plan review to keep the offer documents within Division 1A relief.
What you will have at the end
An executed plan, Division 1A-compliant offer documents, tax-optimised grant structure, and an ongoing administration process for grants, vesting, exercises, and ATO reporting.
Common issues
- Offer outside Division 1A relief without s 708 fallback
- Start-up concession relied on despite company failing eligibility
- Leaver provisions inconsistent with tax deferred taxing point rules
- Constitution does not permit the specific instrument granted
- Annual ESS statements not lodged with the ATO
Run this workflow on a real matter
Quillio drafts the plan rules, Division 1A offer pack, and ATO ESS reporting template, and checks each grant against the current relief criteria. See /practice-areas/commercial-lawyers or start a free trial at /free-trial.
General guide only — not legal advice. ESS interacts with tax and employment law; obtain specialist advice on eligibility and reporting.
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