Employee Share Schemes are a popular initiative for companies to reward high-performing employees. It’s a simple yet powerful idea: let the people who fuel a company’s success own a piece of the action. But there are considerations for Employee Share Schemes, especially when it comes to tax.

Employers

There are several tax considerations that employers need to keep in mind when initiating an Employee Share Scheme.

Taxed upfront

When employees receive shares or rights to acquire shares at a discount, the discount is taxed as income. A $1,000 tax reduction can apply if the Employee Share Scheme meets certain conditions, such as being offered to Australian employees with three years of service who don’t exceed an adjusted taxable income of $180,000.

Tax-Deferred Schemes

Employees are eligible to defer taxation until a specified event, like exercising rights to acquire shares. The taxable amount considers any share value increase, potentially leading to higher tax.

Salary Sacrificing Arrangements

Employees can forego up to $5,000 of pre-tax salary annually for Employee Share Scheme shares.

Concession for Start-ups

Start-ups enjoy special Employee Share Scheme tax concessions if they are private, Australian-based, younger than ten years, have less than $50 million turnover, and offer the Employee Share Scheme to genuine employees without exceeding a 10% shareholding post-grant.

ESS Reporting

Employers who provide Employee Share Scheme interests to their employees are required to report these transactions to both the employees involved and the Australian Taxation Office. This reporting is crucial for tax compliance and ensures that employees have the necessary information for their tax returns.

• To the Employee: Employers must provide an Employee Share Scheme statement to each participating employee by 14 July following the end of the financial year in which the Employee Share Scheme interests are granted. This statement should detail the number of interests granted, the market value at the time of grant, the discount provided, and any amounts that have been taxed upfront.
• To the ATO: Similarly, employers must submit an Employee Share Scheme annual report to the ATO by 14 August each year, covering all transactions in the previous financial year. This report includes additional details required by the ATO for monitoring and compliance purposes.

Employees

Commonly asked questions related to Employee Share Scheme taxation from employees.

Do I get taxed when I receive ESS interests?

No, you will not be taxed when you receive interests under an Employee Share Scheme as you are not receiving any money.

In Australia, when you acquire interests such as shares or rights to acquire shares under an Employee Share Scheme, you are taxed on the discount you receive (if any) from the market value of the shares or rights to acquire shares. This tax event occurs at the time of acquisition under a taxed-upfront scheme or at a later point under a tax-deferred scheme. The taxation rules aim to tax the benefit received from obtaining shares at less than their market value.

Do I have to pay Capital Gains Tax (CGT) when I sell my ESS interests?

Yes, you may have to pay Capital Gains Tax when you sell or dispose of your share or rights.

When you dispose of your shares, any profit you make is considered a capital gain and is subject to CGT. The cost base for calculating this gain includes the market value of the shares at the time you acquired them, adjusted for any amounts already included in your assessable income. This ensures that you are not taxed twice on the discount you received when acquiring the shares.

I’m a Temporary Resident, do I need to pay tax on my ESS?

As a temporary resident, you may need to pay tax on your Employee Share Scheme shares.

If you acquire shares or options under an employee share scheme while you are a temporary resident, you are subject to Australian tax on the discount you receive at the time of acquisition, similar to permanent residents. However, your tax obligations may vary based on your individual circumstances, including any tax treaties between Australia and your home country. It’s important to consult with a tax professional to understand the specific tax implications for your situation.

Conclusion

Employee Share Schemes offer a compelling way for companies to align their employees’ interests with the success of the business. At Automic Group we can advise on the nuances and tax implications of Employee Share Option Plans, an Employee Share Purchase Plan, or any other form of Employee Share Scheme.

For detailed insights and tailored solutions, contact Automic Group at sales@automicgroup.com.au.