Early Exercise in Australia: Maximise Your Employee Share Options in 2025

If you’re working for a fast-growing Australian startup or an ASX-listed company, chances are you’ve been offered employee share options. But when those options vest, should you hold tight—or pull the trigger and exercise early? The decision to exercise your options before they’re due (known as ‘early exercise’) can be a game-changer for your tax bill and your future wealth, but it’s not always a straightforward call.

What Is Early Exercise and Why Does It Matter?

Early exercise means converting your vested options into company shares before their expiration—or sometimes even before they vest, if your company allows it. While this move isn’t the default in Australia, it’s gaining popularity, especially in the startup sector where option plans are increasingly generous and flexible.

• Early exercise is usually available only if your company’s plan allows it. Some Australian startups are now writing this flexibility into their Employee Share Option Plans (ESOPs).

• It allows you to purchase shares at the strike price, which could be well below future market value—if your company succeeds.

• The main reason Aussies consider early exercise is for tax minimisation and to start the capital gains tax (CGT) clock sooner.

2025 Policy Changes: New Rules, New Opportunities

Australian tax law has always been a minefield for employee equity, but several recent updates are making early exercise a more attractive option in 2025:

• ESOP tax deferral: As of 1 July 2022, eligible startup ESOPs allow employees to defer tax on their options until a “cessation time” (such as sale of shares, leaving the company, or 15 years after grant). This has carried through to 2025, with the ATO issuing clearer guidance on what counts as a qualifying plan.

• 30% CGT discount: By exercising early and holding your shares for at least 12 months, you may qualify for the CGT discount on any gains when you eventually sell.

• Startup concessions: The ATO continues to offer special startup tax concessions—meaning you may pay no upfront tax at all if your plan meets strict criteria (unlisted company, less than $50M turnover, etc.).

• Employee share schemes (ESS) reporting: In 2025, companies are now required to provide more detailed ESS statements, making it easier for employees to track their options, vesting, and tax triggers.

These policy tweaks mean early exercise could be more beneficial than ever—if you understand the fine print and act at the right time.

When Early Exercise Makes Sense—And When It Doesn’t

Early exercise isn’t for everyone. Here’s when it may be a smart move for Australians in 2025:

• Your company’s valuation is low: If you believe your employer is on the verge of rapid growth, exercising now locks in a lower strike price, potentially maximising gains down the line.

• You can access startup tax concessions: For qualifying plans, you may face little to no upfront tax on exercise, and future profits may be taxed as capital gains rather than income.

• You’re planning to stay long-term: Exercising early and holding for 12+ months may unlock the CGT discount, reducing your tax bill by up to 50% on future gains.

But beware of the risks:

• Cash outlay: Exercising early means paying the strike price upfront, often before you know if the shares will be worth more in the future.

• Liquidity risk: Especially in startups, your shares may be illiquid for years—you might not be able to sell until an IPO or acquisition.

• Tax timing: If your plan doesn’t qualify for tax deferral, you could face a tax bill on paper gains—before you see any real cash.

Example: Sarah, a software engineer at a Sydney fintech, is granted 10,000 options with a strike price of $1/share in 2023. In 2025, the company is booming and her options vest. She exercises early at $1/share, while the current market value is $3/share. Because her plan qualifies for startup concessions, she pays no tax on exercise. Two years later, she sells her shares for $10 each—her gains are taxed as capital gains, with the 30% CGT discount applied. Sarah’s early move saves her thousands in tax.

Strategic Tips for Australians Considering Early Exercise in 2025

• Check if your company’s ESOP allows early exercise—and whether the plan meets startup concession rules.

• Model out potential tax bills using the latest ATO calculators and 2025 thresholds.

• Consider the timing: exercising early may help you qualify for the CGT discount, but only if you hold the shares for 12+ months.

• Weigh the risk of tying up cash in illiquid shares against the potential upside—and your personal financial situation.

• Keep all ESS statements and documents—2025 reporting rules mean mistakes are easier to spot (and fix) at tax time.

Conclusion: Is Early Exercise Worth It?

Early exercise can be a powerful strategy for Australians looking to build wealth through employee share options, especially as 2025’s tax rules and startup concessions become more accessible. But the right move depends on your company’s growth prospects, the flexibility of its ESOP, and your personal risk tolerance. Understand the rules, crunch the numbers, and you could turn your options into real, long-term gains.