Employee share schemes and your tax
Employee share schemes (ESS) are often used by businesses to provide additional incentives to their staff members. The schemes can help attract new employees or boost retention and they can encourage exceptional work results.
When a worker has a vested interest in the success of a business it can motivate them to increase their output and really dedicate themselves to the company.
If you have been offered an ESS it can be a great financial benefit, but it’s important that you understand employee share scheme tax implications.
You could find you have both income tax obligations as well as capital gains tax liability. It’s helpful to speak with a professional accountant or financial advisor to make sure you implement the most tax effective strategy.
Employee share scheme explained
An ESS enables employees to own shares in the company they work for. The Australian Government’s Moneysmart website says:
“There are different ways of paying for shares, such as:
- salary sacrifice over a set period (say, 6 months)
- dividends received on shares
- a loan from your employer
- full payment up front.
You may be eligible to receive shares as a performance bonus, or as remuneration instead of a higher salary. Larger companies typically offer ‘ordinary shares’, which give an equity investment in the company.
In a smaller company, you may get dividends only, which means you don’t get other shareholder rights, such as a vote at the annual general meeting.”
As mentioned above, it’s not uncommon for an ESS to be offered as part of a performance bonus or instead of a higher salary. And this is becoming more prevalent across a number of industries. The banking sector regularly uses them, but they are also popular within tech companies such as Google, Microsoft or Salesforce.
As part of the ESS, there is usually a time allocation assigned to the plan. The ‘vesting period’, as it is known, is a set number of years that the employee must remain at the company until they can access the capital held within the shares. This tends to be from three to five years.
“Receiving an ESS doesn’t trigger tax right away — you’re taxable only when the shares vest.”
How it impacts your tax
While an ESS can certainly have significant financial benefits, there are certain tax outcomes that you need to consider.
Receiving an ESS today doesn’t have any immediate taxable effect. You’ve simply received shares in the company – not any money. Even if you’ve received it as a bonus, it’s not the same as monetary remuneration.
But there is a future tax event that you need to prepare for. When the vesting period is complete, you need to have funds available to pay your potential tax bill. You might want to have the cash already saved – perhaps offset in your mortgage or in a separate savings account. Or you might end up selling a portion of your shares to cover the tax you owe. Whatever option you choose, this is one of the aspects you need to consider.
Additionally, you have to be mindful of capital gains tax (CGT) liabilities because if you choose to sell some of your shares, this could result in a capital gain. When your ESS vests there is usually a small window of time where you can sell shares without incurring a CGT liability, but if you miss that window, you might find yourself owing.
“Once the vesting period ends, you must be prepared for possible income tax and capital gains tax liabilities when you sell your shares.”
Seek professional advice
We understand that navigating tax minimisation strategies can be complicated.
There are numerous options available to you, so if you are considering or already have an ESS, we recommend seeking professional advice to make sure you achieve the best financial outcome.
Our team is always ready to help if you have any questions, so please contact us today.
About the author
Marius Fourie - Director & Business Advisor
As Director and Business Advisor, Marius uses his accounting expertise and empathetic skills to work directly with business owners and help them feel at ease with their finances.
Marius saw a common need in clients that just wasn’t being met by accounting providers.
That need was for clear, open communication and streamlined accounting services that didn’t come padded out with any unnecessary features.
Business owners just don’t have time to compare different accounting firms to see which one has the best packages with the best inclusions (many of which they would pay for but never use).
Key Takeaways
ESS Can Be Tax-Effective if Structured Correctly
The tax outcome depends heavily on how the scheme is designed and whether it meets concessional requirements.
Timing of Tax Is Critical
Understanding when a tax point arises helps employees plan for potential tax liabilities and manage their cash flow.
Start-Up Concessions Can Be Valuable
Eligible start-ups may access concessional ESS rules that delay tax until shares are sold and apply capital gains tax treatment.
Driven by our values
Effortless and Seamless
On-Boarding Process
Intuitive and Knowledgeable
Direct Expert
Access
Useful and Articulate
Financial
Reporting
Forward
Thinking
Compliance Solutions
Streamlined
Tech
Integrated and Automated
Frequently Asked Questions
What is an Employee Share Scheme (ESS)?
An Employee Share Scheme allows businesses to offer employees shares or rights (such as options) in the company as part of their remuneration, helping align staff incentives with business growth.
How are Employee Share Schemes taxed in Australia?
ESS interests are generally taxed either upfront or at a later point in time, depending on the type of scheme and whether certain conditions are met. The tax treatment determines when the employee includes the value of the shares or options in their assessable income.
What is a deferred taxing point?
A deferred taxing point occurs when tax is paid at a later event, such as when restrictions on the shares lift, the shares are sold, or the employee leaves the company, rather than when the ESS interest is granted.
Are there tax concessions available under ESS rules?
Yes. Certain ESS arrangements, including start-up concession schemes, can provide favourable tax treatment if eligibility criteria are met, potentially reducing or deferring tax for employees.
What are the employer’s obligations under an ESS?
Employers must meet reporting requirements, provide ESS statements to employees, and lodge an ESS annual report with the ATO. Accurate valuation and documentation are essential.
How does an Employee Share Scheme (ESS) impact my tax in Australia?
North Advisory explains that an Employee Share Scheme (ESS) can be a great financial benefit, but it’s important to understand the tax implications, as you may face income tax obligations and capital gains tax (CGT) liability. While receiving shares doesn’t usually create an immediate tax bill, a future tax event can occur when the shares vest, so it’s important to plan ahead and ensure you have funds available to cover any tax payable (or consider selling some shares if needed).
North Advisory’s Reviews 
On 
Flo Mitchell
4 weeks ago
Changed to this company in 2019 from former accountant and love their approach of organizing everything for me face to face with Xero set up plus being able to call as much as I need for set annual fee. They also picked up on something that was not done correctly by my former accountant and saved me $4k for this.
Timothy Cummins
A month ago
They the truly the best, Martin and Judy are so experienced, knowledgeable & professonal, also quite like speaking with Rose : ) all people are so lovely!
Michael Iera
2 months ago
Positive, Responsiveness, Quality, Professionalism, Value
Michael Iera
2 months ago
Excellent company in regards to service and professionalism. Very experienced in dealing with complex matters. Highly recommended.
Reach out we are here to help
Recognising the uniqueness of each business, we specialise in customised accounting services crafted to meet your specific needs and drive business growth.
Don’t hesitate to contact us if you’re ready to streamline your financial management with tailored solutions. Your business’s success is our primary focus. Fill in the contact form or call us to book an initial 30-minute chat.
Suite 6, 11 Oaks Avenue
Dee Why, Northern Beaches
NSW 2099
Australia