What is an employee share scheme?
An employee share scheme (ESS) is a scheme under which shares, stapled securities or rights to acquire such shares or securities in a company (known as ESS interests) are provided to an employee, a person in an employee like relationship or their associate in relation to the employee’s employment.
ESS – Employer’s perspective
What are the types of Employee Share Schemes?
There are many types of employee share schemes (ESS). The tax treatment that applies depends on the type of scheme.
The tax treatment can be either:
- non concessional this means the employee or scheme does not meet the conditions for special tax treatment to apply
- concessional this means the employee and scheme meet the conditions for concessional tax treatment to apply.
Please note that a lot of different types of schemes can be offered by the employer to the employee.
Indeterminate rights
During the acquisition of a right by your employee, the entitlement to a share may be uncertain. For example, you could provide your employee with a right to acquire at a future time either shares or cash, shares with a specified total value, rather than a specified number of shares, or an indeterminate number of shares, that is, the exact number of shares is not specified at the time the employee acquires the right.
The law applies as if that right had always been rights to acquire those shares from the time the original right was acquired, when it becomes clear that the right will result in the receipt of shares (if previously it could have been shares or cash), or a definite number of shares (if previously it was shares to a total value or an unspecified number of shares).
Calculating the discount
Start up concession
For ESS interests that are shares acquired under a start up concession, you will need to calculate the discount to ensure that the eligibility criteria for the concession have been met. The discount must be no more than 15% of the share’s market value when the employee acquires it. If all criteria for the concession are met, the discount is not taxable, and the employee does not need to report the discount amount to us.
For ESS interests that are rights acquired under a start up concession, you will need to ensure that the eligibility criteria for the concession have been met by checking that the amount payable to exercise the ESS interest is greater than or equal to the market value of an ordinary share in the company when the ESS interest is acquired. If all criteria for the concession are met, the employee does not need to report the discount amount to the ATO.
Taxed upfront scheme
For ESS interests acquired under taxed upfront schemes, you will need to calculate the discount (market value of the ESS interests when they are acquired less any consideration paid or payable by your employees, for the interests) and then include this amount on the statements you provide to the ATO and your employees.
Tax deferred scheme
For ESS interests acquired under tax deferred schemes you will need to determine the amount to be included in your employee’s assessable income in the income year that the deferred taxing point occurs. The amount to be included is the market value of the ESS interest at the deferred taxing point, reduced by the cost base of the ESS interest (the cost base may include other expenses, such as brokerage fees).
When calculating the discount amount at the deferred taxing point, you may not know all the elements of the cost base. In that case you may reasonably estimate costs when calculating the discount.
Employer Obligations
Reporting to your employee
If you provide your employees or their associates with ESS interests under an employee share scheme you have certain reporting obligations.
An ESS interest is either a beneficial interest in a share of a company or a right to acquire a beneficial interest in a share of a company.
The interests can be shares, stapled securities, or rights (including options) to acquire shares or stapled securities.
You will need to report to your employee on the following:
ESS Statement
You must give your employee an ESS statement if:
- they or their associates, have acquired ESS interests under a taxed upfront ESS at a discount during the financial year
- a deferred taxing point for ESS interests acquired under a tax deferred ESS, or a cessation time for shares and rights acquired before 1 July 2009, happened or could have happened in the financial year
- a start up concession acquisition event occurred, you must provide your employee with the following information about ESS interests acquired during the income year
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- number of ESS interests acquired
- market value of ESS interests acquired
- acquisition price of ESS interests that are shares
- exercise price of ESS interests that are rights
- acquisition date of the ESS interests.
Please note that you must provide the ESS statement to your employee by 14 July after the end of the financial year. An administrative penalty applies to providers who fail to provide the statement.
The information required on the ESS statement includes, but is not limited to, the following:
- the discount for ESS interests acquired under each type of taxed upfront scheme
- the discount for ESS interests acquired under a tax deferred scheme if a taxing point happened during the financial year
- the discount for shares and rights acquired before 1 July 2009 if a cessation time occurred during the financial year
- the total TFN amount withheld from discounts during the financial year.
When determining and reporting the discount at the deferred taxing point to your employee, you must take account of the 30 day rule if you know the ESS interests were disposed of by the employee.
Start up concession
If your employee is eligible for the start up concession, you must provide your employee with the following information about ESS interests acquired during the income year:
- number of ESS interests acquired
- market value of ESS interests acquired
- acquisition price of ESS interests that are shares
- exercise price of ESS interests that are rights
- acquisition date of the ESS interests.
ESS interests provided to an associate
The ESS rules treat ESS interests provided to an associate of your employee as if they were acquired by your employee, rather than their associate. Depending on the type of scheme and individual circumstances, your employee will have to pay tax, either upfront or at the deferred taxing point.
Once tax has been paid under the ESS rules and the interests move into the CGT system, any future capital gain or capital loss incurred on these interests is borne by the associate. You must provide a statement to your employee, rather than to their associate, to fulfil your reporting requirements.
Reporting amendments to your employee
If you become aware of any material change to or omission from any information given to your employee on their ESS statement, you must use the Amended employee share scheme statement form to provide them with the corrected information within 30 days of becoming aware of the change or omission.
Reporting to the ATO
Reports are due by 14 August each year. If in any case, unforeseen circumstances affect your ability to lodge by 14 August, an extension of time may help. You can submit an extension of time request via the Online services for business or Online services for agents. Employers should report amendments as soon as it becomes apparent that records have been omitted or not reported correctly. It is important to note, once a file has been lodged with respect to a particular employer, any further (amendment) files must be submitted via the same method.
TFN Withholding
There will be withholding if:
- you provide a discounted ESS interest to your employee
- that employee has not given you their TFN or ABN by the end of the relevant income year.
Please note that no withholding is payable If your employee has given you a TFN declaration for their employment. Withholding is calculated on the discount your employee should include in their assessable income under the ESS rules.
Rate of Withholding
The rate of withholding is the highest individual marginal tax rate plus the Medicare levy.
Under no circumstances can you withhold in excess of this rate, nor should you withhold amounts when your employee has provided you their TFN.
If your employee wants additional amounts withheld, they can only do so from salary or wage payments you make to them.
Pay the amounts withheld
You must pay amounts you withheld to the ATO within 21 days after the end of the income year your employee is taxed on the discount. For taxed upfront schemes, this is the year your employee acquired the ESS interests. For tax deferred schemes, this is the year the deferred taxing point arises. If you pay the amounts you withheld to the ATO, you can recover these amounts from your employee. You can do this by offsetting the amount of withholding paid against any amount you owe to your employee, such as salary and wage income. Employers have reporting obligations and must withhold tax if no TFN is provided. The withholding rate where no TFN is provided is 47% (from 1 July 2017).
ESS – Employee’s Perspective
As an employee, your employer will need to do three key things for your ESS:
Tell you if you are eligible
Your employer will tell you if you are eligible to participate in an employee share scheme.
Tell you the type of scheme
They will also tell you whether the employee share scheme or schemes offered meet the criteria for the start up concession, taxed upfront eligible for reduction or tax deferred schemes. This will help you work out whether you will need to pay tax on any discounts received in the year in which you acquire the ESS interests or at a later time. They will not tell you if your own circumstances allow you to access the concessions. You will need to review your taxable income after adjustments and also determine whether you meet the ownership and voting rights test.
Give you an ESS statement
Your employer will give you an ESS statement detailing the discount amounts you need to include in your assessable income for each income year.
Your ESS statement will show the:
- discount for ESS interests acquired under each type of taxed upfront scheme
- discount for ESS interests acquired under a tax deferred scheme for which a taxing point arose during the financial year
- discount for shares and rights acquired before 1 July 2009 for which a cessation time occurred during the financial year
- total TFN amounts withheld from discounts during the financial year
- details of shares and options acquired under the start up concession (this will help you complete any capital gains tax calculations when you sell the ESS interests or the shares you acquired from exercising your ESS interests).
Please note that your employer must give you an ESS statement by 14 July after the end of the relevant financial year. This ESS statement will help you complete your tax return.
Tax return
If you receive ESS interests in a taxed upfront scheme or have a deferred taxing point for your ESS interests in a tax deferred scheme, you need to include the discount in your tax return. You will need your ESS statements from your employer.
If you have participated in a taxed upfront scheme eligible for reduction, you may be able to reduce your taxable income by up to $1,000.
In order to access the $1,000 reduction you must:
- have a taxable income after adjustments in the income year of $180,000 or less, and
- satisfy the
- 10% ownership and voting rights test immediately after acquiring the ESS interests (ESS interests acquired after 30 June 2015)
- 5% ownership and voting rights test immediately after acquiring the ESS interests (ESS interests acquired between 1 July 2009 and 30 June 2015).
When preparing your tax return, you must calculate your taxable income after adjustments for the income year in order to determine whether you are entitled to the $1,000 reduction.
Forfeiture or loss of ESS interests
If you have included a discount on your ESS interests in your assessable income, you may be entitled to exclude the discount and receive a refund of any tax paid in relation to those interests, if the interests are either subsequently forfeited, or in the case of a right, forfeited, lapsed, expired or lost (without the right having been disposed of or exercised).
For ESS interest acquired from 1 July 2015 you are only entitled to a refund if all of the following apply:
- the conditions of the scheme did not have the direct effect of protecting you from a fall in the market value of the interest
- the forfeiture or loss was not the result of a choice you made, except where the choice was to either cease employment, or if the ESS interest was a right, not to exercise the right before it lapsed or allow the right to be cancelled.
Please note that if you are entitled to a refund, you are treated as never having acquired your ESS interests. You can amend your tax return for the income year the discount was included. There is no time limit for amending a tax return to exclude this amount from your assessable income.
For the CGT consequences of your employer buying back your shares, see our Share Buyback Tax article.
This article is general information only and does not provide advice to address your personal circumstances. To make an informed decision you should contact an appropriately qualified professional.