Employee share schemes and your tax
Posted by Northadvisory on May 30, 2022
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 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 to be offered an ESS 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.
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.
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.
Read more Personal Tax articles.