BDO Senior Manager, Tax Mark D’Angelica says the share schemes also provide a win/win for companies by allowing them to save money on wages in lean times and reward staff with dividends in profitable years.

He says it is emerging as a key strategy for attracting and keeping staff, safeguarding succession plans and reducing costs.

“This past year I’ve never done as much advice on the taxing point of shares and options as I am doing now,” D’Angelica says.

“We’re just seeing a lot of them and I think it’s a good way to incentivise your staff.

“If the employees have got skin in the game and if employers have got a way to keep them there, it creates a sense of being on a journey together. Millennials who are starting up businesses are looking at employee share schemes for their remuneration structure as it makes their employees feel rewarded for their efforts beyond a salary.”

Traditionally associated with listed companies, employee share schemes (ESS) are now also becoming more common with private companies looking to develop succession plans and startups trying to keep costs down.

“I’ve even seen it in hospitality – it’s not just large corporates, it’s all businesses,” D’Angelica says.

“It’s also a way of changing your remuneration structure so you can survive. If you don’t make any money then you won’t have to pay any dividends and if you do then the employees win so it’s a win/win for both.

“However, share and options packages can be worth a lot more at the senior executive level.

In October, the Australian Taxation Office released Draft Taxation Determination TD 2021/D5 to help companies determine when ‘genuine disposal restrictions’ apply to interests provided under an employee share scheme.

It is important that employers review this guidance to ensure that the taxing point of the ESS is clear, and whether there should be any amendments plan rules if there is any ambiguity, as this could impact their ESS compliance obligations with the ATO and the tax position of their employees.

D’Angelica says issued shares and options are generally viewed by the ATO as being a substitution for salary so they are usually taxed up front unless there are restrictions that allow the taxing point to be deferred to a later date when the restrictions are lifted.

He says employees can usually access some tax concessions if they satisfy certain criteria or at least a tax deferral until a later date and you can hold the shares and receive dividends in the meantime.

“Tax-free thresholds are available for companies, and tax concessions for startups up to a certain limit, which is very beneficial to get the ball rolling with investors, so they are very popular with unlisted companies.”

While ESS values vary from company to company some start out by giving staff $1000 worth of shares within the tax-free threshold provided certain requirements are met, or in some cases up to $5000 that employees can salary sacrifice.

“The timing of when you are actually taxed on them is very important as that determines whether employees will be taxed on the value of the shares at the date they are granted, or whether you can defer the tax to a later date,” D’Angelica says.

“Once the taxing point happens for the shares, any further gains resulting from an increase in value will then be taxed under the capital gains tax regime. This is an important consideration for tax planning.

“The capital gains tax discount is something that you can’t access with income so if you make gains on your shares and you’ve held them for more than 12 months then you can access capital gains tax concessions of 50 per cent.”

D’Angelica says the ATO has made big steps to try and make it easier for companies to implement an ESS but it’s still very important that they understand the requirements.

“There’s also the impact it has on other taxes so if the taxing point for the shares or options has occurred, then there needs to be a consideration of other things like payroll tax,” he says.

“It’s important that employers and employees seek tax advice, and this new guidance from the tax office should be considered to make sure that they are ticking off all the requirements to ensure they are compliant.

“It’s a good feeling when you have shares in the company you’re working for and that’s why I think we are seeing a lot of it because everyone is seeing the benefit.”