Employee Share Schemes (ESS) remain a popular choice for retaining and rewarding employees in an increasingly competitive labour market. However, the attraction of equity awards is tempered by complicated tax rules that can result in different tax outcomes for different employees.
We outline the various income tax considerations and employer reporting obligations when it comes to ESS. In addition, we explain how BDO’s ESS annual reporting solution is designed to automate the preparation, lodgement, and reporting of ESS statements and annual reports.
Share and stock options
There are a range of equity alternatives at the disposal of employers, primarily based around shares and stock options. These shares and options can be tailored to include bespoke features, thereby enhancing the value to both the company and the employee. The inclusion of features, such as forfeiture conditions and disposal restrictions, may impact how those awards are subject to income tax in the hands of the employee.
The Australian tax rules provide more favourable tax treatment for equity awards granted by start-ups that satisfy certain conditions. For company founders wishing to invite their employees to be co-owners, the start-up concession can result in the equity granted to employees not being subject to tax at the time of grant. This may also result in employees being eligible for a 50 per cent discount when calculating Capital Gains Tax (CGT).
As borders re-open, we are seeing an uptick in globally mobile employees. Some of these employees are returning home after many years stuck abroad, while others are on new assignments as companies seek to capitalise on new business opportunities. When employees who hold equity awards move across borders, they may find themselves subject to income tax in multiple jurisdictions. These employees need to carefully manage their personal income tax affairs, in order to ensure they are compliant with the tax rules that apply to equity awards in each of the countries where they have been.
While employees are responsible for their own income tax obligations, employers who provide equity awards are responsible for reporting to both the Australian Taxation Office (ATO) and the employee.
Employer reporting obligations can arise when:
You should bear in mind that from 1 July 2022, cessation of employment will no longer trigger a deferred taxing point.
Employers are required to provide ESS statements to their employees by 14 July, after the tax year-end. Employers must also lodge ESS annual reporting to the ATO by 14 August, following the tax year-end.
The ATO no longer accepts ESS annual reporting lodgements via paper or spreadsheet. ESS reporting must be done electronically online via the ATO portal, or via software which is compatible with ATO systems. The ATO portal is restricted to reporting for 50 employees or less, with no more than three ESS types (e.g. restricted shares, share options, etc.) per employee. This limitation of the ATO portal presents a challenge for many employers who do not have the necessary software to lodge their ESS reporting.
BDO’s ESS annual reporting solution is designed to automate the preparation, lodgement, and reporting of ESS statements and annual reports. Our software is compatible with ATO systems. It is robust and enables us to manage large volumes of data, with built-in data validation to ensure compliance with ATO guidelines.
Our automated solution starts with your raw data and calculates the taxable discount - including apportionments for overseas employees - generates ESS statements, and lodges your annual reporting.
The benefits of our solution include:
In addition, ESS must be reported for state payroll tax purposes if you are registered for payroll tax. Our solution calculates the taxable ESS amount to be declared in your annual payroll tax reconciliation.
BDO can assist with any tax planning for employees who participate in ESS. We can support your employees with their tax return compliance, particularly for more complex circumstances such as globally mobile employees. If you have any questions about BDO’s ESS solution, or require assistance with any of the above, please contact your local BDO Tax adviser.