As the financial year draws to a close, it's crucial for employers with an Employee Share Scheme (ESS) to turn their attention to their reporting obligations. Failing to comply with these obligations can result in administrative penalties, which can be easily avoided with timely and accurate reporting.
There are two important deadlines to keep in mind:
1. Reporting to employees; and
2. Reporting to the Australian Taxation Office (ATO).
Employers must issue an ESS statement to their employees by 14 July, providing them with a comprehensive overview of their share scheme participation. Following this, employers are required to lodge an annual ESS report with the ATO by 14 August, ensuring that the necessary information reaches the tax authorities in a timely manner.
While these reporting obligations may seem straightforward, the ATO has implemented specific requirements and formats for ESS reporting that can pose difficulties for some organisations. If an employer needs to report ESS for more than 50 employees and/or has more than three share schemes, it is required to use special software when submitting the annual ESS report to the ATO. This software can be purchased, developed in-house or accessed through the services of a tax agent.
Understanding ESS taxing points
Another complexity with ESS reporting involves identifying the plan’s taxing points. As of 1 July 2022, termination of employment is no longer considered a taxing point in Australia, which represents a small step towards simplification.
Employers must have a clear understanding of the different scenarios that trigger tax obligations.
Startup organisations may benefit from the preferential tax rules associated with post-2015 startup concessional ESS rules. ATO reporting may be required when shares or options are granted, even if no income tax is otherwise payable at that time.
At the other end of the spectrum, established share and options plans utilised by multinational organisations are often drafted according to the rules of another jurisdiction. These require a more detailed review to understand if they align with Australian ESS rules, to identify the correct taxing and reporting points.
Reporting ESS for globally mobile employees adds another layer of complexity. Employers must identify which employees are subject to ESS reporting and consider their reporting obligations in multiple jurisdictions, each with its own set of regulations. For example, Australian tax residents are typically taxed on the entire ESS discount amount, with the ability to claim a foreign income tax offset if they are taxed on the same income in another jurisdiction. However, a temporary resident or non-resident may be taxable only on the Australia-sourced portion of the ESS discount. The complexity for employers can be in knowing their employees’ tax residency status.
How we can help?
Fortunately, BDO offers a comprehensive solution to assist employers with their ESS reporting obligations. Our team has the expertise and software necessary to review employee share plans and accurately identify the correct taxing points. We can determine whether globally mobile employees are subject to ESS reporting and collaborate with a network of international firms to provide advice on tax implications across various jurisdictions.
Our software streamlines the reporting process by converting raw data into an ATO-compliant format, minimising manual data entry and reducing the likelihood of errors. We can also generate employee ESS statements, providing a breakdown of the ESS discount, as well as a cover letter. By offering an end-to-end service, we help simplify the administrative processes associated with ESS reporting, allowing employers to focus on their core business operations.
BDO in Australia