Employee Share Schemes
What is an ESS?
Employee share schemes (ESS) are plans used by businesses to provide an alternative option of payment through distributing company shares.
Employees can receive their shares at a discounted price or can be given an opportunity by the business to purchase shares in the future.
Employees who don’t receive shares at a discount, won’t have the ESS tax rules apply to them.
Employees are eligible for tax concessions under the condition that both the business and employee have met the requirements of the Australian Tax Office (ATO).
How are ESS taxable for employees?
Employees are required to pay tax on the discount provided on the ESS interest and are exempt from capital gains tax (CGT) until the discount on the interest has been deemed assessable, which occurs when the ESS interest is sold or disposed.
The discount provided is assessable given the ESS does not follow the requirements of the concessional scheme.
The discount provided to an employee on their share is usually assessable upfront.
However, an employee that has been taxed upfront is entitled to a $1000 exemption under the condition that their adjustable taxable income is no more than $180,000.
To receive the exemption, the employee must adhere to the ATO’s requirements.
Not meeting the requirements results in the discount received on the ESS interest to be taxed in full without the $1000 exemption.
Furthermore, employees that are a part of a small start-up company are eligible for a start-up concession when obtaining company shares or rights.
An income tax exemption is provided on the discount of the shares and the income tax on the discount received on a right is differed, instead taxed under the CGT rules.
How can a ESS be deferred?
Employees’ taxes on ESSs can be deferred by choosing tax-deferred schemes allowing employees to defer paying taxes on their ESS interests.
Partaking in a tax-deferred scheme will allow employees to defer their taxes from the year the shares were acquired up until the income year at which the deferred taxing point occurs.
The taxing point may be deferred in schemes such as salary sacrifice, schemes where there is a real risk of forfeiture, and a disposal restriction scheme.
However, to receive concessional tax treatment, you must be aware of the conditions.
These include that the ESS interest are at a real risk of forfeiture and the employee does not earn and control more than 10% of the voting power in the company.
Tax-deferred schemes such as:
- Salary sacrifice: Provides employees with the opportunity to surrender a set amount of their salary or wage in return for being provided with something of similar value and includes benefits such as fringe, exempt and super. However, under the condition that the employee does not obtain more than $5000 worth of shares per year.
- Real risk of forfeiture: The shares given to employees carry a risk where the share may be lost or forfeited. In this case, the shares acquired under this scheme are taxed in the income year the deferred taxing point occurs. The taxes on the ESS can be deferred if the shares eventually become forfeited or lost, at which point the employee can amend their income tax return and remove the discount received from their shares as assessable income.
- Disposal restrictions: If an employee were to acquire an ESS interest as a right, they can defer their taxes from the year the shares were acquired up until the income year at which the deferred taxing point occurs.
To conclude, when setting up an employee share scheme or electing to partake in one, it is important to consider when you utilize a tax deferable scheme that adheres to the standards of the concessional scheme and has tax benefits for employees.
If you have any further enquires about setting up or participating in an ESS, please contact our office.
Note: the above is current as at the date of this article and is of a general nature only and should not be relied upon. Please consider the above against your personal circumstances and if you have any questions, contact our office.
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