Peter Bardos
Employee share schemes (ESS) are becoming an increasingly popular incentive in Australian workplaces, but both employers and employees should be aware of the significant tax implications these arrangements may carry, Peter Bardos, tax partner at HLB Mann Judd Sydney said.
Such schemes allow employees to benefit from the success of the business while for businesses, ESS can be an effective tool for staff retention and wealth creation in some circumstances. However the tax treatment varies considerably depending on the structure of the scheme, he said.
“Typically, they fall into three categories: taxed-upfront schemes, tax-deferred schemes and start-up concessions,” Mr Bardos said.
“Many employees don’t realise that the discount they receive on the shares issued from the scheme is often treated as taxable income upfront, which can create cash flow challenges.
“This is particularly relevant for standard employee share purchase plans where shares are offered below market value.”
Mr Bardos said a major risk to ESS is that many employees lack understanding of the fundamental principles, such as how the funds will be sold in the future if the shares aren’t listed on a stock exchange. Additionally, many ESS involve options instead of shares as well as loan arrangements.
“Employers will usually seek professional advice to ensure an efficient outcomes for employees, however they should seek their own independent advice to understand their personal circumstances,” Mr Bardos said.
“We have seen unfortunate cases where employees have held shares that have eventually become worthless.
“Any shares should be considered as any other investment and form part of a balanced investment approach, especially once any sale restrictions are lifted.”
Mr Bardos said some schemes qualify for deferred tax treatment, where the tax point is delayed until certain conditions are met, such as the lifting of sale restrictions. However, this deferral can lead to larger tax bills down the track if share values have appreciated significantly.
He said special tax concessions – where eligible employees can avoid having their discounted shares assessed as taxable income – can apply to unlisted Australian startups that are less than 10 years old and have a turnover of less than $50 million.
“The main benefit of the startup concession is that employees are not assessed on any discount and will usually only pay tax on a future sale. This allows alignment of the cash benefit and tax payment as well as a lower rate of tax where the ESS is held for more than 12 months.”
The tax implications become even more complex for employees of multinational companies, where cross-border rules and foreign tax arrangements may create additional Australian tax obligations.
“Both employers and employees need to carefully consider these tax consequences when implementing or participating in share schemes,” Mr Bardos said.
“Professional advice is crucial to avoid unexpected tax bills and to ensure compliance with all relevant regulations.”
