What is the employee share scheme tax in Australia?
Employee Share Scheme (ESS) tax in Australia involves taxing the discount received on shares or options, usually at the point of exercise or vesting. Specific rules apply, including potential deferral of tax and concessions for eligible schemes.
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How it works in practice
Understanding Employee Share Scheme (ESS) Tax
Employee Share Schemes (ESS) allow employees to acquire shares or options in the company they work for, often at a discounted price. The "discount" is generally the difference between the market value of the shares or options and the price the employee paid for them. In Australia, this discount is usually treated as assessable income and is subject to income tax.
The timing of when this discount is taxed can vary. For most schemes, the taxing point is when there is no longer a real risk of forfeiture and any restrictions on selling the shares are lifted. This is often referred to as the "vesting" or "cessation of risk" point. The aim is to tax the benefit when it becomes more certain and accessible to the employee.
How ESS is Taxed
The Australian Taxation Office (ATO) categorises ESS interests into different types, each with its own tax rules. Some schemes allow for tax deferral, meaning the tax liability on the discount is postponed until a later event, such as when the shares are sold. Other schemes may offer specific concessions, particularly for eligible startup companies, which can significantly reduce or eliminate the upfront tax burden, making them an attractive incentive for employees.
Important exceptions
Not all ESS discounts are taxed upfront or in the same way. The first $1,000 of an ESS discount may be exempt from tax under specific conditions. Furthermore, shares or options acquired under an eligible startup company ESS may qualify for significant tax concessions if strict criteria are met, including the company being a startup, meeting certain asset and turnover tests, and the discount not exceeding the market value. Specific rules apply to tax-deferred schemes, where the taxing event is delayed until a later point, such as sale or when employment ends.
What you should do now
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Understand your ESS statement: Review the annual Employee Share Scheme statement from your employer, which details the value of any discounts and the taxing point.
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Determine the taxing point: Identify when the ESS discount becomes assessable – usually upon vesting, exercise, or removal of restrictions, not necessarily when you receive the shares.
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Check for eligibility for concessions: Assess if your scheme qualifies for any tax concessions, such as the $1,000 exemption or startup concessions, as this impacts your tax liability.
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Report ESS income correctly: Include your ESS income on your annual tax return (Item 12) in the year the taxing event occurs, using the information from your ESS statement.
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Seek professional advice: Consult a tax advisor for complex ESS arrangements or if you are unsure about your specific tax obligations.
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