Employee share schemes (ESS) have always been one of the most tax-effective ways for executives, directors and employees to build wealth, and the 2026 Capital Gains Tax changes have made their advantages even more compelling.
GRG Remuneration Insight 187
24 July 2026
Why Employee Share Schemes Tax Treatment Outperforms CGT for Executive Wealth Creation
Employee share schemes (ESS) have always had an advantaged position to enable executives, directors and employees to grow wealth. This is because a rarely understood outcome of ESS tax treatment is that it generally produces superior net benefits for participants, compared to any other taxing arrangement. Since the 2026 Budget changes to capital gains tax (CGT), this is truer now more than ever before. This article demonstrates how this occurs and urges review of ESS arrangements in companies to ensure that they optimise this opportunity, and make it available to the right groups, to maximise the benefits for the Company by maximising the benefits for stakeholders.
Why Executives Are Best Placed to Invest in Their Own Company
For senior executives and directors, the company for which they work is the one about which they have the most in-depth knowledge. They know the company’s financial position, its competitive advantages and opportunities, its business plans and strategies, the markets in which it operates, its competitors, the regulatory environment in which it operates and community expectations. All this information should distinguish the company from other investment alternatives. Provided this knowledge points to the company as a good investment then executives and directors should lean to investing in their company over any other.
How Employee Share Schemes Work
ESS provide a tax advantaged means by which executives and directors and indeed any other employees may invest in their employer company. They may be used in many ways including:
- Salary sacrifice or other approaches to including tax deferred equity interest acquisitions as part of fixed remuneration packages – note that salary sacrifice share acquisitions (a specific inflexible and limited $5,000 concession under the ESS provisions) represents the least attractive way of doing this,
- Deferring part or all of short term variable remuneration (STVR) awards into tax deferred equity interests,
- Long term variable remuneration (LTVR) awards in the form of performance vesting tax deferred equity interests, and
- Sign-on or retention awards in the form of service vesting tax deferred equity interests.
Most companies should be using a combination of these opportunities due to the significant advantages for all stakeholders, including, in a growing business, the net cost to the company, and the net value it delivers to participants.
The Business Case for Introducing an Employee Share Schemes
Any plan that results in grants of equity interests that form part of reasonable remuneration will be well regarded by various stakeholders. Stakeholders tend to have a strong preference for executives and directors to have significant skin-in-the-game and ESS facilitates this outcome. Further, it is known to drive superior company performance, sustainability and decision making. At the economic level, the government has identified it as a key issue for Australian competitiveness in a global market and has enshrined special treatment for ESS arrangements to provide compelling financial incentives for eligible persons to participate. In addition, providing part of remuneration in the form of an ESS grant will preserve cash for the company and can, in some circumstances, generate higher tax deductions for the company compared to paying in cash. This is because the end value of the equity can be claimed as a tax deduction, while the starting value of the equity is all that need be expensed in accounts. This can produce profit, if company growth is sufficiently high between the date of grant, and the date of settlement, which can be up to 15 years later.
Employee Share Schemes and Insider Trading: What Executives Need to Know
Division 3 of Part 7.10 of the Corporations Act prohibits insider trading in a company’s shares. However, prohibitions only apply to Division 3 “financial products” which are defined in Section 1042A as a variety of products including securities and derivatives and any other financial products “able to be traded on a financial market”. Section 1042E defines this term as Division 3 financial products that are ordinarily tradable on a licensed market including those suspended from trading by the ASX or by ASIC. Accordingly, unlisted rights or options are not subject to the prohibitions, and neither are new shares during the period between issue and listing of those shares. Further where an external trustee acquires shares on the ASX on behalf of beneficiaries of an employee share trust (EST), the prohibitions do not apply unless the trustee was relying on “inside information” which is generally uncommon. While GRG is certainly not advocating insider trading, concerns over this matter are often raised as impediments to executives and directors acquiring more equity, at both ends of the process; in terms of acquiring shares on-market, and when selling them. Of course, if the ESS interests turn into shares which are listed on a financial market, then the insider trading provisions may apply to sales of these shares. However, by allowing ESS interests to be held un-taxed for up to 15 years, the framework supports long term holding and helps to manage the matter since many KMP will have moved on to other businesses within this time frame, removing the insider trading risk.
The 2026 CGT Changes and Why Employee Share Schemes Wins
Currently most investment property (not family home or property sold within 12 months of acquisition) qualifies for a 50% discount meaning that 50% of the capital gain is tax free when the property is sold. While the government has focussed its commentary on real estate, CGT also applies to other forms of property including shares and other equity interests that do not fall within the ESS taxing provisions.
The proposed change is that the 50% discount will be changed to an amount calculated by reference to the inflation rates that applied while the property was held. In GRG Remuneration Insight No. 186 “How the 2026 Federal Budget CGT Changes Impact Executive Equity Plans” the outcomes under both CGT taxing approaches are canvassed for a range of growth and inflation rates. A clear conclusion from the analysis is that ESS tax treatment is the vastly superior outcome when the share price is growing. This was in fact always the case; while more tax may be paid in absolute terms, the net benefit is also generally greater because of the deferral of tax payments for up to 15 years. The outcome could, and can still be described, as being equivalent to a 100% CGT discount; the changes to CGT tax just make this difference larger and even more valuable. This is demonstrated below.
Employee Share Schemes vs CGT: A Direct Comparison of After-Tax Outcomes
Conservative Example
The following example is based on the following assumptions:
- The executive receives a bonus of $100,000,
- Tax on the bonus if paid via payroll, at 47% including 2% Medicare Levy, is $47,000,
- The net of tax amount is used to purchase company shares,
- The shares are held for 5 Years before they are sold,
- The shares experience a 6% p.a. compound annual growth rate (CAGR),
- The annual inflation is 3% during the period the shares were held,
- Had the executive received the bonus as equity interest then they would have received $100,000 of equity interests and paid no tax at the time of acquisitions under an ESS.
The following compares three situations:
- After tax investment with 50% CGT discount,
- After tax investment with CPI CGT discount, and
- ESS equity interest investment.
Because the CPI (3%) was set at 50% of the CAGR (6%), there is little difference between the two after tax investments in terms of net of tax benefit realised. The ESS outperforms both of the after-tax investment examples. The amount of the outperformance equals the amount of CGT paid in relation to the after-tax investments. Yet interestingly enough the government raised more tax under the ESS scenario, making it a win/win outcome.
For companies that pay little or no dividends it would be expected that the CAGR could be materially higher than the conservative 6% used in the example. In such cases the amount of the advantage to be gained from the ESS approach becomes much larger. Further, under the proposed CPI indexation approach the discount would then be much lower than the 50% discount with the result that the advantage of the ESS approach would become much larger.
The impact of higher CAGRs and longer holding periods are illustrated in the next section.
Higher Growth & Longer Holding Period
If equity interests are held for periods longer than 5 years or the CAGR is greater than 6% then the relative advantage of the ESS approach increases. Examples follow to illustrate this point.
Longer Holding Periods
Two longer holding periods are used being 10 and 15 years with the latter being the longest ESS tax deferral period.
Higher CAGRs
Two higher CAGRs are used being 15% and 30%.
Longer Holding Periods & Higher CAGRs
This example uses a 15 year holding period and a CAGR of 30%.
The Dividends
It is important not to overlook that the ESS approach also confers additional benefits because there is in effect an 89% larger investment (based on 47% marginal personal tax rate) under the ESS approach, meaning 89% more dividends or dividend equivalents, if applicable. Dividend equivalents are a feature often made available under modern rights plans; a cash payment equivalent to a dividend arises at the same time as dividends to other shareholders, noting that a vested right with a nil exercise price is identical to a share in virtually all senses except that it has not yet been converted i.e. other stakeholders should be indifferent to this. The advantage is illustrated in the following example based on the previous example and assuming cash dividends of $4,000 p.a., (4% yield) which are fully franked. The dividends advantage of the ESS approach may be most relevant to “blue chip” companies that pay strong consistent dividends but achieve lower rates of growth than many other companies.
Why You Should Review Your Employee Share Scheme Plan Before July 2027
Even though the proposed CGT changes do not come into effect until July 2027 the forgoing examples show that a properly structured ESS produces better outcomes for executives and directors than the current 50% CGT discount or the proposed CPI discount. Hence, there is no point in delaying the implementation of a contemporary ESS which maximises benefits for executives and directors.
A rights plan will generally be the optimal ESS, but many current rights plans contain design flaws such as:
- Terms for rights of less than 15 years,
- Automatic exercise,
- Failure to confer dividend equivalent entitlement,
- Using time-based disposal restrictions on shares acquired on exercise of rights to defer the taxing point, and
- Failure to defer the taxing point when new share issues subject to s707 of the Corporations Act cannot be sold for 12 months.
Further, currently many equity plans are very limited in their application, often only being used for LTVR for executives. Instead, the business can maximise the value to all stakeholders by including NEDs, STVR settlement (without material deferral if preferred), fixed pay arrangements and indeed extending such arrangements to all employees.
Expert advice should be sought to develop an optimal rights plan which may need shareholder approval but in any case needs to be implemented so that grants to directors may be submitted for shareholder approval at the company’s next general meeting.
