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.
Common ESS tax treatments
There are several tax considerations that companies and employees should understand when implementing or participating in an Employee Share Scheme.
Taxed upfront
When employees receive shares or rights to acquire shares at a discount, the discount may be taxed as income. A reduction of up to $1,000 in the taxable discount may apply if the Employee Share Scheme and employee meet the relevant conditions, including the employee income test.
Tax-Deferred Schemes
Employees may be able to defer taxation until a deferred taxing point occurs, such as when rights are exercised or disposal restrictions are lifted. The taxable amount is generally based on the market value of the ESS interests at the deferred taxing point, less any amount paid to acquire those interests and certain related costs.
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 may access special Employee Share Scheme tax concessions if they meet the relevant conditions, including being an unlisted Australian company, less than ten years old, with aggregated turnover of no more than $50 million, and ensuring employees do not hold more than 10% ownership or voting rights after the grant.
ESS Reporting
Employers who provide Employee Share Scheme interests to employees are required to report relevant ESS transactions to both employees and the Australian Taxation Office.
- To the employee: Employers must provide an Employee Share Scheme statement to each relevant employee by 14 July after the end of the financial year. This statement includes reportable ESS amounts, including taxed-upfront discounts and tax-deferred amounts where a deferred taxing point occurred during the financial year.
- To the ATO: Employers must lodge an Employee Share Scheme annual report with the ATO by 14 August each year, covering reportable ESS transactions for the previous financial year.
Employees
Commonly asked questions related to Employee Share Scheme taxation from employees.
Do I get taxed when I receive ESS interests?
It depends on the type of Employee Share Scheme. Under a taxed-upfront scheme, you may be taxed on the discount when you acquire the ESS interests. Under a tax-deferred scheme, tax may be deferred until a later taxing point. You are generally taxed on the discount you receive, not on the receipt of cash.
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 shares, rights, or shares acquired from rights. In most cases, the discount is dealt with under the ESS tax rules first. Later gains or losses are then dealt with under the CGT rules. For tax-deferred ESS interests, the CGT cost base is generally reset to market value at the deferred taxing point.
I’m a Temporary Resident, do I need to pay tax on my ESS?
As a temporary resident, you may need to pay Australian tax on ESS interests, particularly where the discount relates to employment in Australia. The outcome can depend on your residency status, where the work was performed, the terms of the scheme, and any applicable tax treaty. You should seek independent tax advice for your circumstances.
Conclusion
Employee Share Schemes can help companies align employees with business performance, but the tax treatment can vary depending on the type of scheme and the employee’s circumstances. Automic Group supports companies with ESS administration, reporting and employee communications. Employees should seek independent tax advice about their personal tax position.
For support with ESS administration, reporting and employee communications, contact Automic Group at sales@automicgroup.com.au
