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Employee Share Schemes (ESS), It’s Tax Implications and Benefits

Understanding Employee Share Schemes in Australia

Employee Share Schemes (ESS), also known as Employee Stock Ownership Plans (ESOPs), are programs that provide employees with shares or options to purchase shares in their employing company. These schemes are designed to give employees a stake in the company, aligning their interests with those of shareholders. The scheme can have various tax implications depending on the specific structure of the Employee Share Scheme and the employee’s circumstances. To understand the tax implications better you can get assistance from the best tax accountant in Perth.

Types of Employee Share Scheme

There are basically two types of Employee Share Scheme (ESS).

  1. Taxed Upfront Scheme: Employees are taxed when they acquire the share or rights.
  2. Tax Deferred Scheme: Employees are taxed later, typically when they exercise the right or sell the shares.

Reporting Requirements

  1. Employee must:
  • Report any discounts or income received under Employee Share Scheme (ESS) in their annual tax return.
  • Use the Employee Share Scheme (ESS) statement provided by their employer to complete their tax filing.
  1. Employer Must:   
  2.  Provide employees with an Employee Share Scheme (ESS) statement by July 14 each year.
  3.  Report Employee Share Scheme (ESS) details to the Australian Taxation Office (ATO).

The Employee Share Scheme (ESS) statement provided to the employee will show the:

  • discount for Employee Share Scheme (ESS) interests acquired under each type of taxed-upfront scheme
  • discount for Employee Share Scheme (ESS) interests acquired under a tax-deferred scheme for which a taxing point arose during the financial year
  • total TFN amounts withheld from discounts during the financial year
  • details of shares and options acquired under the start-up concession (this will help the taxpayer complete any capital gains tax calculations when they sell the ESS interests or the shares, they acquired from exercising their ESS interests).

Tax Implications

  1. Taxed-Upfront Schemes:
  • Discount Taxed as Income: If the discount on the shares or rights is less than $1,000, it might be tax-free for employees under certain conditions. The employer will determine whether these conditions are satisfied and advise the employee and the ATO.
  • Immediate Tax Obligation: The discount received on the shares or rights is included in the employee’s assessable income in the year of acquisition.
  1. Tax-Deferred Schemes:
  • Deferred Taxation: Tax is deferred until a later event, such as when the employee exercises the rights or sells the shares. This can be beneficial if the employee expects to be in a lower tax bracket in the future or if the shares appreciate.
  • Qualifying Conditions: Certain conditions must be met for an Employee Share Scheme (ESS) to qualify as a tax-deferred scheme, including a minimum holding period and specific rules about disposal restrictions.

For more detailed knowledge on tax liability, you can seek advice from tax professionals such as tax agents, tax accountants, or tax advisors.

Capital Gains Tax (CGT)

Once the shares are acquired under an Employee Share Scheme (ESS), any subsequent increase in their value is subject to Capital Gains Tax (CGT) when the shares are sold. The CGT event occurs at the time of sale, and if the shares have been held for more than 12 months, the seller may qualify for a 50% CGT discount on the gain. To ensure accurate calculation and proper reporting in your tax return, seeking advice from the best tax accountants in Perth can provide valuable guidance and simplify the process. For instance, if you purchase shares at $10 each and sell them later at $20, the $10 gain is subject to CGT. Holding the shares for over 12 months qualifies you for a 50% discount on the taxable gain.

Q: What is an Employee Share Scheme?

A: An Employee Share Scheme (ESS) is a company’s way of sharing ownership with its employees. It’s a strategy to motivate, reward, and retain talent by offering shares or options to purchase shares in the company.

Q: What types of companies can offer Employee Share Schemes?

A: Almost any company, from startups to large corporations, can offer Employee Share Schemes. However, the specific structure and tax implications might vary depending on the company’s size and the industry it operates in.

Q: How do I know if my Employee Share Scheme is taxed upfront or deferred?

A: The tax treatment of your Employee Share Scheme (ESS), whether taxed upfront or deferred, depends on the specific terms and conditions of the scheme. Employers typically provide this information when offering the scheme. To fully understand the details, it’s important to review the ESS documentation and consult with a tax advisor. Seeking assistance from a tax agent in Perth can help simplify the process.

Q: What is taxed under the Employee Share Scheme?

A: The discount (market value minus purchase price) is taxed as income, and any profit on sale is taxed as a capital gain.

Q: Can ESS tax be deferred?

A: Yes, tax can be deferred for up to 15 years or until the shares are sold/restrictions are lifted.

Q: Can I sell my shares immediately once they become fully owned?

A: This depends on the specific terms of your ESS. Some schemes may have restrictions on when shares can be sold. Additionally, selling shares may trigger a capital gains tax event.

Q: Are there any risks associated with Employee Share Schemes(ESS)?

A: Yes, there are risks involved. The value of the shares may change depending on the company’s performance and market conditions, meaning employees could lose money if the stock price falls. Additionally, the tax implications can be complex. It’s advisable to consult a professional tax accountant in Perth for expert guidance.

Q3: Are Employee Share Schemes (ESS) benefits always taxable?

Yes, but the timing varies. Tax can be applied when the shares are granted, exercised, or sold. However, some concessions, like the $1,000 tax-free threshold for certain schemes, may apply.

Q: How does Capital Gains Tax apply to Employee Share Schemes?

A: Once you acquire shares through an Employee Share Scheme (ESS), any value-added tax (CGT) will be charged on sales. If you hold the shares for more than 12 months, you may be eligible for a CGT rebate of 50% of the gain. Consulting a tax professional in Perth can help you navigate this process smoothly. 

Conclusion

Given the complexity of tax implications associated with Employee Share Scheme (ESS) , both employees and employers are advised to seek professional tax advice to ensure compliance and to optimize their tax positions.

For the most current and detailed information, it is recommended to refer to the Australian Taxation Office (ATO) guidelines or consult with a tax professional.

If you have any questions about maximizing your financial well-being, please feel free to contact one of our Bookkeeper / Tax Agent / Tax Accountant at 0893860047. Let’s shape your success together!