Employee Share Schemes (ESS) and Your Tax

This is one of the main times of the year when thoughts turn to granting of shares, performance rights and options (ESS Interests) to executive & non-executive directors and other key personnel.

Invariably a number of urgent questions come up as part of drafting the Notice of Meeting (NOM) from Board members and proposed recipients (which may be one and the same).

Some of the questions we are asked include (but not limited to):

  • Do I pay tax up-front on my performance rights?
  • Do I pay tax when I exercise my options?
  • When do I pay tax and how long can I defer it for?
  • Do I have to take the shares in my own name, and if I do not, is there a different tax treatment?
  • Why can the valuation in the NOM be different from what I am assessed on by the Australian Taxation Office (ATO)?
  • What are our reporting requirements relating to the ESS Interest provided to the recipients and the ATO?
  • Are there any other implications e.g. pay-roll tax?

The answer to all of the above is “it depends on the relevant facts and circumstances”.

Notwithstanding, some key points are:

  • The ATO monitors listed company remuneration reports and therefore knows who has received what ESS interests.
  • That you hear of another individual dealing with their ESS interests in a particular manner does not necessarily mean they have dealt with their taxation correctly.
  • General tax advice on ESS interests may be a good starting point but you need to obtain tax advice specific to your circumstances. Two individuals in the same company, receiving exactly the same ESS interests, and on the same marginal tax rate, can have materially different tax outcomes.
  • Make sure the specific tax advice is based on the actual documentation relating to the ESS interests to be granted. There have been circumstances where we have seen advice previously provided on broad concepts, but the actual taxation impact has been materially different due to the documentation not fully matching those broad concepts.
  • Some “old” (pre-1 July 2015 or even pre-1 July 2009) ESS interests may have been forgotten, but depending on the facts and circumstances, you may have or have had an income tax liability that has not been dealt with.

If you have any questions regarding the above, please contact myself at gbrandon@hlbwa.com.au or call (08) 9227 7500.