Employee Share Schemes (ESS) - Shares Appearing as Taxable Income

man37 on 17/10/2024 - 10:07
Last edited 17/10/2024 - 11:09 by 1 other user

Good morning all, I received shares from my company in last financial year, and when lodging my tax return, they are appearing as income, even though I haven't sold them yet.

This is causing the ATO calculator to show that I owe a significant amount of money to the ATO. Since I don't intend to sell my shares at this time, I would prefer to pay the tax when the actual selling event occurs.

What options do I have in this situation? I am currently unable to pay thousands of dollars to the ATO this year, especially given that the tax on my salary has already been deducted.

I appreciate any guidance.

Thanks

• 

  MS Paint on 17/10/2024 - 10:11

  +3

  I assume you've read this

• 

  holdenmg on 17/10/2024 - 10:11

  +2

  It matters if you got them under a ESS or an ESAP.

  With a ESAP you may be able to defer the taxation of the shares until you’re able to sell them. Even then, you’ll be taxed at the capital gains tax (CGT) rate instead.

  Ask the ATO, your Tax Agent or Accountant.

• 

  man37 on 17/10/2024 - 10:28

  It says Employee Share Scheme.

• 

  scotty on 17/10/2024 - 10:34

  +14

  When you receive shares through ESS, it's treated as assessable income for tax purposes. For example if you receive $5,000 worth of share for free, then that's $5,000 extra assessable income for you for the current financial year, even when it has not yet been liquidated to cash. Later on when you actually want to sell it, capital gain would be calculated between the sold value and the value when you received those shares.

  I got a massive hit when I resigned from my previous job 13 years ago (to work on OzBargain full time). Low 7-figure extra assessable income. Ended up having to sell half of the shares to pay for the tax expense.

  I think it's one reason why private companies would hesitate to give shares to their employees, as those shares can't be sold on the stock exchange to cover the tax expense.

  But yeah, ask your account.

• 

  vorsprung on 17/10/2024 - 10:58

  +2

  Keep in mind you can probably go on a payment plan for your tax debt.

• 

  wots on 17/10/2024 - 11:17

  +4

  Visit an accountant to discuss your options. At the very least, the accountant can extend your tax lodgement date (I believe it'll be March?) to give you more time to gather the amount you owe.

• 

  Danstar on 17/10/2024 - 11:21

  +2

  The shares the company contributes on top of the shares you buy as considered income.

  E.g. if you have used your usual salary to buy $5000 worth of shares, and your company contributed $1000 on top of that, the $1000 is considered income.

• 

  freefall101 on 17/10/2024 - 11:46

  +1

  As above, visit your accountant, but if you're able to sell the shares right now and cash in then generally you need to pay tax straight away.

  There can be deferred tax when there are restrictions on sale. Did anyone mention a deferred taxing point to you? Or did they just give you shares and you can do what you want with them?

• 

  wannagrababargain on 17/10/2024 - 11:54

  The ESS management company should also send you a tax statement to help filling in your tax return. Your company is also obliged to tell the ATO hence the pre-filled values. Yes free shares are considered income and you need to pay tax on the income. ESS schemes (free shares) are taxed up front. To ease the burden the first $1,000 under this scheme is tax free (subject to an income test.) Again the company managing the ESS should mention this on their tax statement. You can go on a PAYG plan in the next financial year to spread out your estimated future tax liability if you think you are going to be receiving another chunk of shares. You may or may not be able to sell the shares immediately, often they are restricted for a fixed number of years or until you leave the company whatever comes first.

• 

  FoxJump on 17/10/2024 - 12:05

  +1

  yep once the current fy ends im gonna be paying tons of ess related tax.. welcome to the club

• 

  MS Paint on 17/10/2024 - 12:23

  Out of curiosity were the shares an 'opt in' or did all the employees receive shares as a gift?

  • 

    man37 on 17/10/2024 - 12:31

    +1

    Employee retention + opt-in.

• 

  Generally Ignorant on 17/10/2024 - 12:32

  Accountant time. I'm in the same boat, the company also has a 'lock up' period most of the year so we are only allowed to sell during set times each quarter.
  There's 2 amounts you will be calculated on:

  • Moment you are able to sell the shares (receive them and are out of lock up)
  • The moment you sell the shares:
    
    • If within 30 days of the first time you could sell them the sale price is consider your taxable income
    • After 30 days you get value at the time you got them (as your taxable income) AND CGT on the sale price (+/- on your receive price)
• 

  original15 on 17/10/2024 - 13:11

  Some companies have a deferred tax scheme but it kinda works out to be the same (besides any dividends in between) as you either pay tax on value of the shares once you get them (sounds like this is your scenario) or you pay the tax on the market value of them once the deferred period is over (a great option if moving from a high to a lower tax bracket)

  But sounds like you will need to pay tax on these shares (sorry as sounds like you thought it was a free gift and no tax on it until you moved them on). They should be providing detailed FAQ about this offer
  Were shares a retention gift or was it like “you buy x amount and we will give you some extra/match what you invest”

  • 

    man37 on 17/10/2024 - 13:36

    +1

    Never thought it was free gift :)
    Only surprise was I have to pay tax now and shares are in intangible state.
    The valuation for the shares at the time of vesting was 25K. Today, I am seeing their value 21K, tax has been calculated on 25K.
    I thought tax will only be paid after you sell, logically if I don't have cash then ATO shouldn't be asking for cash :)
    Apologies for me being naive in this domain.

    • 

      jhaley3180 on 18/10/2024 - 07:49

      +2

      @man37 with respect your logic is flawed. The shares were worth whatever the shares were worth at the time you were "paid" with them. Imagine a system where people could be paid in shares and not have to pay tax until sale… Not only could you avoid tax in the year of vesting but by spreading the sale of shares you could potentially avoid all tax.
      Similarly, some companies might provide other benefits to employees, I don't know, like a car, this benefit is called a fringe benefit and also taxed.
      Point being, you've received a financial benefit from your employer, some of that is in the form of money in your account and some is in the form of shares. You are expected to pay income tax on the financial benefit you've received.

      • 

        man37 on 18/10/2024 - 09:01

        +2

        Understood and learning day by day from this online community, thanks very much!

    • 

      wannagrababargain on 28/10/2024 - 07:45

      That's rough. Yea in hindsight would have been better to sell them the instant you received them if they were unrestricted. Might be worth trying to keep them though, over time could grow into a nice little nest egg.Is it a big company? Do you think the share price will grow over time? Do they pay dividends?

      Another thing to keep in mind. If you sell them now at a loss you will have a CGT loss event, you can carry forward that capital loss indefinitely to offset capital gains in future years. So not all is lost!

• 

  od1n on 17/10/2024 - 19:44

  +1

  Well, you learnt it the hard way. From ATO point of view when you received shares it means you gained something (a price of shares on the day of vesting X number of shares) and as such you must pay taxes for that. But spoiler alert, when you sell the shares you will also have to pay a CGT tax on the difference between the price of shares when they were vested and when you actually sold it.

  E.g. you got 10 shares when they were at $100 per share, and sold it 5 years later when it costs $1000 - you would need to pay the income tax from 10x1000, and when you sell it you will pay CGT from $ (1000-100) x 10 == $9000. Also if you hold shares for more than a year than CGT will be twice lower.

  There is a way to avoid CGT if you sell shares within 30 days of vesting, but there is no way to avoid the income tax. You would def need to consider some help from real accountants (not internet randos) to help you with delaying the payment if you cannot afford it right now.

• 

  man37 on 18/10/2024 - 06:36

  +1

  Thanks very much everyone. You all have been quite helpful.

• 

  Bob Svargis on 18/10/2024 - 13:25

  Absolutely you'll be taxed. It's income. Even if you don't sell them, they are assets.

  They should have informed you of this when you signed your contract with them. And with the benefit of hindsight, perhaps you should have spoken to an accountant at the time (although it's easy to be a Monday morning quarterback - sorry…) Ultimately, it's an asset, and you're benefiting from it, so the ATO wants its share.

  If you are struggling to pay your tax burden, you might consider selling your shares.

  My employer runs training sessions each year covering off vesting and share rights etc, but I bet there's employers out there who don't.

  One tax effective option that others in my company do, is exercise their rights on vesting and sell immediately on July 1. That can reduce your CGT but you will pay income tax, but you won't have to pay it until October 31 the following year.

  Or… exercise your rights to take the shares on July 1, hold on to them until July 2 the following year and sell - you'd have until Oct 31 to pay the income tax based on the value of the shares when you exercised and you'd save on CGT.

  Or… exercise your rights, hold on to the shares - and pay income tax on the value of your shares by Oct 31.

  All rather tricky and I might have it wrong also - which is why you should see an accountant as every situation is unique.

  If you hang on to the shares for more than a year, your CGT is halved.

• 

  Cumulus on 18/10/2024 - 16:44

  +1

  You receive remuneration, you pay tax, sounds fair.