Employee share schemes (ESS) give employees shares in the company they work for or the opportunity to purchase shares in the company they are working for. One of the main reasons employers offer this incentive is to attract and retain good employees.
2 Methods of taxation for Employee Share Schemes:
– Taxed Upfront Scheme
– Tax Deferred Scheme
Under both methods tax is payable on the discount amount given by the employer to the employee to be able to obtain the shares. The discount amount is the market value of the ESS less any amount paid by the employee to obtain the shares.
For example, Core Bank Ltd offers its employee Matt 600 shares under an ESS. The total market value of the shares is $10,000. Core bank offers the shares to Matt for a cost of $6,000.
The discount amount is $4,000 (the market value less the cost to the employee). Matt will include the $4,000 of income in his tax return and pay tax on this amount at his marginal tax rate. If Matt didn’t pay anything for the shares and they were all given to him for free he would include $10,000 in his tax return as income.
Employees using the taxed upfront scheme will receive a tax concessions of $1,000 provided they pass an income test. In Matt’s first example he would only need to include $3,000 in his current tax return if he was taxed upfront. The $1,000 concessions does not apply to the tax deferred scheme.
Tax Deferred Scheme:
Where the taxation of the ESS is deferred the discount will be included in the employee’s income tax return at the earliest of the following times:
– When the employee ceases employment (however employment ceasing after 1/7/22 will no longer be a deferred taxing point)
– The date in which there is no longer any risk of forfeiture and the restrictions regarding disposal are lifted or
– Seven years (15 years from 1 July 2015) after the shares/rights were granted.
The above are known as the “deferred taxing point” which is when the ESS discount received becomes taxable to the individual and also becomes the date of purchase for CGT purposes. Note that the date that the employee share scheme arrangement was made is not considered the acquisition date.
In most cases the deferred taxing point is when the employee has the shares registered in their own name and can choose to dispose of the shares.
30 Day Rule:
Where an employee disposes of their shares or rights within 30 days of the deferred taxing point, the deferred taxing point becomes the date of sale. Consequently, the capital gain or loss on disposal is disregarded and the amount of the discount is included in your assessable income in the income year the deferred taxing point occurred.
Author: Rhys Frewin
Email: rhys@faj.com.au
