How ESS valuations work in Australia

What does an ESS valuation actually need to show?

An ESS valuation prepared for the start-up concession has one job: it establishes the market value of an ordinary share in the company at the time the ESS interest, a share or a right to acquire a share, is provided ⁴. That is a specific basis of value (market value, in the sense used throughout Division 83A) applied to a specific unit of value (one ordinary share, not the whole company and not a class of preference shares).

This is a narrower question than it looks. A funding round usually sets a price for preference shares or a converting instrument negotiated between the company and an investor; the ATO has no published rule that equates that price with the market value of an ordinary share ⁵. A financial report might carry a fair value figure prepared under AASB 13, but the ATO is explicit that fair value for accounting purposes is not the same as market value for tax purposes ⁶. We also prepare financial-reporting fair value valuations, AASB 2 option values and AASB 13 fair value, each scoped and quoted separately, because that is a different basis from market value for tax ⁶. An ESS valuation answers the Division 83A question on its own terms, using evidence appropriate to that question, not a number produced for a different purpose. Our guide to a recent raise as valuation evidence works through that distinction, and our guide to ordinary and preference shares works through why the two classes are rarely worth the same per share.

What is the start-up concession, and why does the valuation sit underneath it?

ESS start-up concession

Conditions in section 83A-33 of the Income Tax Assessment Act 1997, part of Division 83A's rules for the immediate inclusion of an ESS discount in assessable income, that, where met, reduce to nil the amount otherwise included in an employee's assessable income when an ESS interest is acquired at a discount ^{7, 4}. It does not remove tax altogether: any gain or loss on eventual disposal is assessed under the capital gains tax rules instead ^{7, 8}.

The conditions turn on the company, the interest and the timing, not on any single number:

Certain venture capital and early-stage investment vehicles, and DGR-endorsed entities, are disregarded when testing the listing and turnover conditions above ⁴. Every one of the tests above, other than the market value tests themselves, is a matter for the company's tax adviser to confirm; the valuation starts once eligibility is settled, and does not decide it.

What are the two safe harbour methods, and which instrument sets them out?

The current instrument is LI 2025/19 (Income Tax Assessment (Methods for Valuing Unlisted Shares for the Employee Share Scheme start-up concession) Legislative Instrument 2025), made under section 960-412(2) of the ITAA 1997, registered 11 September 2025 as F2025L01085, in force from 1 October 2025 ². It repealed and replaced the Income Tax Assessment (Methods for Valuing Unlisted Shares) Approval 2015 directly, which would otherwise have sunset on 1 October 2025 ^{2, 3}. There was no separate instrument between the two: any reference to that 2015 Approval as still current is out of date ^{2, 3}.

The methods are approved for working out the market value of an unlisted ordinary share for the section 83A-33(5) test only where the company provides an ESS interest at that time and the directors reasonably anticipate no change of control within the following 6 months ². Both limbs apply before either method is available, not as an afterthought.

Method One: the comprehensive method

Method One is worked out by the company's CFO or by a suitable valuer, a person with the skill, knowledge and experience required to determine the market value of unlisted shares ², taking into account, on a reasonable basis, four prescribed matters:

The methodology and the resulting value then need to be endorsed by a written resolution of the directors ². The explanatory statement makes one point explicit that is easy to assume the wrong way: under Method One, the valuer does not need to be independent of the company ³. A claim that the safe harbour requires an independent valuation is not correct ³.

Method Two: the net tangible assets method

Method Two is only available where three further conditions are all met, in addition to the change of control condition above ²:

Where those conditions hold, Method Two works out net tangible assets, disregarding preference shares. From that figure it deducts the amount needed to discharge preference share obligations, disregarding any contingency and any amount that would not rank ahead of ordinary shareholders on a winding up. The result is divided by the number of ordinary shares, plus any preference shares participating in residual assets on a winding up, on issue at the valuation time ².

A company that raised a large amount of capital shortly before the valuation time cannot fall back on Method Two: the explanatory statement's own worked example is a company that raised $125 million three months earlier and is for that reason unable to use it ³.

The alternative method

A company is not limited to Method One or Method Two. Under section 6(2) of the instrument, any other method is also approved if it gives a value not less than the value under a method the company could have chosen under section 6(1) ^{2, 1}. It is therefore only available where the change of control condition is also met, and the company must be able to show the comparison. The ATO gives a discounted cash flow model or a valuation prepared for capital raising purposes as examples of an alternative method ¹. In our view this is most relevant to a company with real trading history, intellectual property value or a recent funding round, where Method Two's asset based formula often understates value. Building the discounted cash flow model itself is included in the Standard start-up valuation ($3,495 + GST), the tier that covers ESS work; see our pricing page for what each tier covers. Delivery time starts once payment and all required information have been received.

What does "binding on the Commissioner" actually mean?

Where a value is worked out using an approved method and the instrument's conditions are met, that value is binding on the Commissioner, but only for the purpose of the specific market value test in section 83A-33(5) of the ITAA 1997, the test that checks the share discount and exercise price conditions of the start-up concession ^{2, 3}.

A value worked out under one of the approved methods may also be used for the company's ESS reporting obligations under Division 392 of the Taxation Administration Act 1953 ³.

What changed to the wider ESS rules in 2022?

The start-up concession sits inside a broader set of ESS rules that changed materially from 2022, separately from the 2025 instrument replacement described above.

The deferred taxing point. For tax-deferred schemes, not the start-up concession, the deferred taxing point for an ESS interest is the earliest of: no real risk of forfeiture and no remaining sale restriction; for a right, exercise with no forfeiture risk or disposal restriction; or 15 years after acquisition. Cessation of employment was also a deferred taxing point, but not where employment ceases on or after 1 July 2022 ⁸. A statement that leaving a job still triggers ESS tax, for employment ending on or after that date, is out of date ⁸.

Corporations Act disclosure and the monetary cap. The employee share scheme provisions in Division 1A of Part 7.12 of the Corporations Act 2001 commenced on 1 October 2022 ⁹. Offers by unlisted bodies that require supporting information must include a valuation document under section 1100X(3): a valuation of the ESS interest prepared consistently with an applicable method approved by the Commissioner of Taxation under section 960-412 of the ITAA 1997; a disclosure document for securities or financial products of the same class on offer at the same time; an executed, or draft, agreement under which ESS interests of the same class are to be acquired on arm's length terms by a third party who is not an associate, specifying the monetary consideration per interest; or a prescribed document ¹⁰. Note the same class requirement: a preference share round agreement is not, on its own, a valuation document for an ordinary share or option offer ¹⁰. For these offers, the basic monetary cap is $30,000 per participant per 12 month period, unless regulations prescribe otherwise, plus 70% of certain distributions and objective based cash remuneration, with unused cap carried forward for up to 4 years ¹⁰.

ASIC relief. In 2022 ASIC made the Corporations (Employee Share Schemes) Instrument 2022/1021, which provided relief including the ability to offer an expert valuation of ESS interests that are not ordinary shares, in addition to the methods listed in section 1100X(3) ⁹. Check its current status before relying on it. An older ASIC guide, RG 49, predates these changes and says so itself: it remains relevant to legacy schemes under the superseded class orders it replaced, not to the post-2022 regime ¹¹.

How are unlisted options and rights valued?

Division 83A does not itself define the market value of an ESS interest ¹². For an unlisted right that must be exercised within 15 years of acquisition, the Income Tax Assessment (1997 Act) Regulations 2021 give the holder a choice: its market value in the ordinary sense, or a value calculated under the regulations ^{13, 12}.

Regulation value of an unlisted right

Under sections 83A-315.01 to 83A-315.09 of the Regulations, the regulation value of an eligible unlisted right is the greater of its intrinsic value (the market value of the underlying share, less the lowest amount payable to exercise the right) and a value read from prescribed tables; where the exercise price is nil or cannot be determined, the value equals the share's market value; a calculation percentage under 50% produces a nil value ¹³.

Two features apply regardless of which value is used. Where the deferred taxing point is the day the right, or the share acquired on exercise, is disposed of, the ordinary meaning of market value must be used, not the regulation value ¹². And in working out market value, anything that would prevent or restrict converting the right to money, such as a disposal restriction or forfeiture condition, is disregarded ^{12, 13}. Either way, the regulation value needs a market value of the underlying unlisted ordinary share as an input. The LI 2025/19 methods are approved only for the section 83A-33(5) start-up concession test ^{2, 3}, so for any other purpose that share value has to be supported as market value in its ordinary meaning ⁶.

What commonly goes wrong with an ESS valuation?

Common ways an ESS valuation ends up unable to support the position it was meant to support:

More generally, acceptability of a valuation for tax purposes usually depends on the process undertaken rather than on who conducted it, and the onus for a replicable, defensible valuation stays with the taxpayer even where a professional is engaged ⁶. The ATO recommends a secondary or cross check method where practical ⁶, which is one reason building a company's discounted cash flow model alongside the chosen safe harbour method is a useful step, not only a deliverable.

How does this connect to a recent raise or to preference shares?

Two related questions come up in almost every ESS engagement. How a recent funding round's evidence should, and should not, be used in an ESS valuation is covered in our guide on a recent raise as valuation evidence. Why an ordinary share is rarely worth the same amount per share as a preference share with liquidation and participation rights attached is covered in our guide on ordinary and preference shares. For choosing a method generally, our method selector guide is the starting point, and where SAFEs or convertible notes are on issue and change the share count, our guide to SAFEs and convertible notes covers how.

What do we prepare, and who is it for?

Start-Up Valuations prepares the market value of an ordinary share for the start-up concession test, or the discounted cash flow model that supports it, for the company, its board or its advisers. This work is delivered through our ESS and ESOP valuations service. We do not tell an employee, option holder or investor whether to acquire, exercise, hold, sell or accept an ESS interest. Fees, delivery timing and add-ons for this work are set out on our pricing page. Delivery time starts once payment and all required information have been received.

Which safe harbour method might fit, before you engage a valuer?

The conditions above interact: a company can be eligible for Method One and ineligible for Method Two, ineligible for both because the directors cannot say they anticipate no change of control within 6 months, or better served by an alternative method. The safe harbour eligibility checker on this page first checks whether the company is providing an ESS interest to a participant at the valuation time and whether the value needed is the market value of an unlisted ordinary share (which is so for a right as well as a share), since the two methods apply only in that setting. Where that is so, it works through Method One's requirements, Method Two's raising, age and reporting tests, and the shared change of control condition, and tells you which methods may be available and why, in general terms. It does not produce a value, a multiple or a recommendation to grant, exercise or accept anything.

Frequently asked questions