Employee Share Schemes – Cutting through the complexity

Employee Share Schemes

If an employee share scheme (ESS) is a substantial portion of your overall remuneration, your earning potential can be more volatile and complex than a simple salary package. 

This article provides a template for the most important considerations to focus on before implementing a wealth and investment strategy that maximises this unique opportunity to preserve and grow your wealth.

Key variables with ESS 

The value of your ESS is likely influenced by a combination of:

• Personal, team and/or company-wide performance-based vesting conditions 
• The length of time you have been employed in the company (i.e. time-based vesting condition)
• A vesting schedule that determines when you can acquire full ownership of the shares 

One of the key benefits of an ESS is the ability to acquire shares at a discount to the market value. This is the amount you are essentially paid to acquire the shares. This forms part of your assessable income and needs to be included in your annual personal tax return.

Depending on the specific structure of the ESS that you have been offered, the discount will either be taxed at the time the shares have been granted or deferred so that any tax is payable at a later time.

Importance of planning

A good starting point to maximising the benefit that your ESS can provide is to map out the relevant dates that dictate your capacity to exercise units, sell shares and fund any tax liability that may arise.  

Particularly if you are entitled to company shares through a number of different schemes, ensure that you pay close attention to the vesting periods, holding locks, expiry dates and any relevant trading windows that may restrict your ability to sell any of your shares after they have vested.

If you decide to sell your shares within 30 days after the deferred taxing point, the deferred taxing point becomes the date of that disposal, and this can create cash flow issues that complicate your strategy.

Effective Structuring

If flexibility around owning some or all of your equity in a trust or through superannuation is facilitated by your company, you should consider these options. 

Before selecting the right mix of entities to own the shares, you need to ensure that the income and capital gains tax (CGT) implications, asset protection characteristics and access to capital are aligned to your personal situation.

If you have already entered an ESS in your personal name, you can consider transferring the shares to a different entity. However, be mindful of the potential tax implications – for example, you may need to confirm that you remain the controlling person in the entity that accepts the asset.

Seeking specialist advice 

Understanding the specific characteristics and tax treatment of your plan can be complex and you should seek specialist advice specific to your personal circumstances before entering into an ESS. However, having a basic knowledge of the primary considerations may help to inform your discussion with a specialist and ensure you have addressed the key issues.

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