Employee Share Schemes: What Do They Mean for You?
Been offered shares or options through your employer and wondering what they actually mean for your wealth and tax position?
Employee Share Schemes (ESS) give employees an opportunity to receive or purchase shares, or rights to acquire shares, in the company they work for.
They can be a valuable part of your remuneration, but understanding what you own, when tax may apply and how the investment fits into your broader wealth plan is important.
How Do Employee Share Schemes Work?
Depending on your employer’s plan, you may be offered:
- Shares in the company, sometimes at a discount.
- Options or rights, which may allow you to acquire shares at an agreed price once certain conditions are met.
Your employer should provide information explaining how the scheme works, including the conditions attached to your shares or options.
The tax treatment will depend on the type of scheme and your individual circumstances.
Understanding the Key Terms
ESS documents can include a lot of terminology. Some of the important terms to understand include:
- Grant – when the shares, options or rights are offered or provided to you.
- Vesting – when certain conditions attached to your ESS interests have been satisfied.
- Exercise – when you use an option or right to acquire the underlying shares.
- Sale – when you dispose of your shares.
- CGT – Capital Gains Tax, which may apply when you later sell your shares.
- CGT discount – eligible individuals may generally receive a 50% discount on a capital gain where the relevant asset has been held for at least 12 months.
How Are Employee Share Schemes Taxed?
There are different types of ESS arrangements, and each can have different tax consequences.
The three common categories are:
- Taxed-upfront schemes.
- Tax-deferred schemes.
- Eligible start-up concession schemes.
Understanding which type applies to you is an important first step.
Taxed-Upfront Schemes
Under a taxed-upfront scheme, the discount you receive on eligible shares or rights is generally included in your assessable income in the income year in which you acquire them.
The discount will generally reflect the difference between the market value of the ESS interest and the amount you paid to acquire it.
Depending on the scheme and your circumstances, you may qualify for an upfront reduction of up to $1,000 if the relevant eligibility requirements are satisfied.
Your employer generally provides you with an ESS statement containing information relevant to completing your tax return.
If you later dispose of the shares or other ESS interests, Capital Gains Tax (CGT) consequences may also need to be considered.
Tax-Deferred Schemes
Some ESS arrangements allow tax on the discount you receive to be deferred until a later taxing point, provided the scheme and employee satisfy the relevant requirements.
Depending on the type of ESS interest, the deferred taxing point can be affected by factors such as:
- When there is no longer a real risk of forfeiting the ESS interest and any genuine restrictions on disposing of the interest have been removed.
- For rights or options, when the interest is exercised and there is no longer a real risk of forfeiting the resulting share and no genuine restriction on disposing of that share.
- The maximum deferral period, which can extend to 15 years for eligible ESS interests.
Importantly, ceasing employment is no longer itself a deferred taxing point where employment ends on or after 1 July 2022.
Special rules can also apply where an ESS interest or resulting share is disposed of within 30 days of the deferred taxing point. In these circumstances, the deferred taxing point may instead be the time of disposal.
Once the ESS discount has been taxed, Capital Gains Tax (CGT) may also apply to subsequent changes in the value of the ESS interest.
Start-Up Schemes
Eligible employees of qualifying start-up companies may receive additional tax concessions for interests acquired under an Employee Share Scheme (ESS).
Where the requirements are satisfied, the discount on eligible ESS interests is generally not included in the employee’s assessable income under the usual ESS taxing rules. Instead, any subsequent gain or loss is generally dealt with under the Capital Gains Tax (CGT) rules when the interest is disposed of.
Specific eligibility requirements apply. Among other conditions:
- The company and its corporate group must generally be unlisted.
- The relevant companies must generally have been incorporated for less than 10 years.
- The company’s aggregated turnover must not exceed $50 million.
- The employing company must be an Australian resident company.
- Shares generally cannot be provided at a discount greater than 15% of their market value.
- For eligible rights or options, the exercise price must be at least the market value of an ordinary share in the company when the right or option is provided.
- The employee generally cannot hold more than 10% ownership or voting rights in the company after acquiring the ESS interest.
- ESS interests are generally subject to a minimum three-year holding requirement, although exceptions can apply, including where employment ceases or in certain takeover or restructure circumstances.
Why Does It Matter?
Receiving shares through your employer can be a great opportunity to build wealth, but it can also mean a growing portion of your wealth and income is connected to one company – the same company that pays your salary.
Understanding your ESS can help you consider:
- When tax may become payable.
- Whether you should hold or sell shares as they become available.
- Your potential Capital Gains Tax position.
- How much of your wealth is concentrated in your employer.
- How your ESS fits alongside your other investments and longer-term financial goals.
The right approach isn’t simply about deciding whether to keep or sell your shares. It’s about understanding how your ESS fits into your overall wealth plan.
Have an Employee Share Scheme and Not Sure What to Do Next?
Start by understanding the type of ESS you have, when your shares or options vest or become exercisable, and what this could mean for your tax and investment position.
From there, we can help you assess your current situation, investment exposure and options as part of your broader wealth strategy.
Talk to us about how your Employee Share Scheme fits within your wealth plan and seek appropriate tax advice regarding the specific tax treatment of your ESS.
General advice warning: The information contained in this article is general in nature only and does not consider your personal objectives, financial situation or needs.
You should consider whether the information is appropriate for your circumstances before acting on it and seek advice from a qualified professional.
Personal financial advice can only be provided after considering your individual circumstances and providing the appropriate disclosure documentation.
VJC Wealth accepts no liability to any party for any loss arising from reliance on this information unless it has been provided as part of a formal advice engagement.
