Employee Share Plans (ESP) give you shares without any strings attached. They are taxed upfront.
Employee Share Plans
In this episode, Rajan Verma of Velocity Legal in Melbourne will talk about the upfront taxation of employee share plans (ESPs).
Here is what we learned but please listen in as Rajan explains all this much better than we ever could.
To listen while you drive, walk or work, just access the episode through a free podcast app on your mobile phone.
Employee Share Plans (ESS)
To talk about Employee Share Plans, you will run into three acronyms: ESS, ESP and ESOP.
ESS
ESS stands for Employee Share Schemes. That is the official term used in the legislation. ESS consists of two types of plans: ESPs and ESOPs.
ESP
ESP stands for Employee Share Plans. You receive shares without any strings attached. You might have to pay something or might get them completely free. But either way, they come with no strings attached. No KPIs. No performance hurdles. They are yours. ESPs are taxed upfront but you might receive one or two concessions. That is what we cover in this episode.
ESOP
ESOP stands for Employee Share Option Plans (ESOPs). You are given an option that might or might not vest. So it is completely up in the air whether that option will ever turn into a share. And so ESOPs only hit your tax return when this option turns into a vested right. But that we will cover in the next episode.
Div 83A
Division 83A of the ITAA97 deals with the taxation of ESPs and ESOPs.
It starts with an ‘all in’ approach. Any discount on the issue of ESPs or ESOPs issued go in the employee’s assessable income in the year of the grant, known as upfront taxation.
For example, if a share is worth $100 but you give it to the employee for free, you include the $100 value in the employee’s assessable income for the year the share is issued.
That is the proposition you start with. But then there come certain modifications that might take the amount back out of assessable income. Those modifications differ between ESPs and ESOPs.
Upfront Taxation versus Deferred Taxation
With upfront taxation, you pay tax immediately on the discount, and any future growth is taxed as a capital gain, which may qualify for the CGT discount.
In contrast, if you defer taxation, any growth up to the deferred taxing point is taxed as income, without the 50% discount. Therefore, if you expect significant growth, choosing upfront taxation could be more beneficial. Special concessions can also enhance the attractiveness of upfront taxation.
Employee Share Plans
The discount for ESPs is taxed upfront (‘upfront taxation’). Not ideal as the employee has to dip into their other income to pay the tax.
However, if you face a real risk of forfeiture and meet certain other conditions, you do not pay the tax upfront. Instead, you defer the tax until the real risk of forfeiture ends, the restriction on disposal lifts, or 15 years pass, whichever comes first.
AUD 1,000 Discount
If an ESP is taxed upfront, you can reduce the discount included in assessable income by up to AUD 1,000. However, to get this:
- the employee’s taxable income must not exceed AUD 180,000;
- their shareholding in the company must not exceed 10%; and
- the scheme must be ‘non-discriminatory’ – i.e. to at least 75% of permanent employees with at least 3 years of service;
- must be no real risk of forfeiting or losing the share;
- must relate to ordinary shares;
- several other requirements, but these are the main ones;
Start-up Concessions
This is a very powerful concession, basically exempts the entire upfront discount from taxation. Also allows the company to adopt a concessional valuation approach which ignores intangibles (like goodwill). However, it has some restrictive requirements:
- company must be less than 10 years old;
- no shares listed on a stock exchange;
- aggregated turnover of no more than $50m;
- You limit the allowable discount to less than 15% of the market value of the shares, or you set the option price to be greater than or equal to the market value of the underlying shares.
So this is a very short summary of what we cover in this episode. But please listen in since Rajan Verma goes into a lot more detail in this episode.
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Pre-CGT Shares and Company Assets
Disclaimer: Tax Talks does not provide financial or tax advice. All information on Tax Talks is of a general nature only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.
Last Updated on 03 September 2024
