Employee Share Schemes

Employee Share Schemes (‘ESS’) what exactly are they and what do you do with them.  We get a LOT of questions on ESS, some of the questions which we are asked frequently are “do I pay tax up-front?” or “when do I pay tax and how long can I defer it for?”.  Unfortunately it’s not a straight forward answer as it depends on a variety of different factors and circumstances.  Generally tax advice on ESS is a good starting point but you need to obtain tax advice specifically to your circumstances.  Two individuals in the same company, receiving exactly the same ESS, and on the same marginal tax rate, can have significantly different tax outcomes.  Let us start with the basics:  ESS give employees a benefit such as shares in the company they work for at a discounted price and the opportunity to buy shares in the company in the future this is called a right or an option.

Being part of an ESS is directly connected to the performance of the company you work for.  It is a direct way to get you as an employee to care about the company’s succession and will lead you to work harder to ensure the company performs well.

There are multiple ways to receive ESS shares, either through salary sacrifice over a set period of time, by using the dividends received on shares already owned, through a special loan from your employer or finally even an upfront payment from your own pocket.  The shares usually come in a form of a ‘option’ that is:  the company promises you shares which you may have the option to buy after a certain period of time has elapsed.

The reason ESS are appealing is the fact they are giving you a future option to buy shares in the company at usually a lower price than the market value of the shares in the future.  It is a discounted price, the discount being the difference between the market value of the ESS interests and the amount you paid to acquire them.  It is important to note the discount forms part of your assessable income and needs to be included in your tax return.

In most cases, employees will be eligible for special tax treatments know as tax concessions.  You should see ESS amounts included on your income tax return as either ‘Discount from taxed upfront schemes – eligible for reduction’ or ‘Discount from taxed upfront schemes – not eligible for reduction’ or at ‘Discount from deferral schemes’.  These are all dealt with in separate ways and have separate tax implications.  In order to be entitled to the tax concession being a reduction of $1,000 to the taxed upfront amount, you will need to prepare your tax return and calculate your taxable income after adjustments for the income year.  If your taxable income after adjustments is $180,000 or less, you may be entitled to reduce your ESS discount amount by up to $1,000.  You cannot use the reduction to reduce your discount amount from a taxed-upfront scheme – eligible for reduction to more than nil.

It is very important to note that a tax-deferred scheme allows you to defer paying tax in relation to your ESS until the income year in which the deferred taxing point occurs, instead of paying tax in the year the interests are acquired.  There are specific conditions for each type of tax-deferred scheme.

ESS can vary widely in their application so if you would like to discuss this further, contact us.

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