For most employee share schemes (ESS), the time at which employees receive shares will typically be the point at which income tax is recognized. Unlike in other jurisdictions, Australian employees (rather than employers) are responsible for the income tax payable in respect of the shares.  

Although employees won’t not need to deal with the income tax on the shares for at least another 12 months, they are subject to the risk of share price movement between the time of receipt and the time tax is payable. This may come as a shock should the employee sell their shares at a lower share price. 

Two simple ways to prevent any tax nightmares: 

1. Include a tax summary in the offer letter
   While participants will have their own personal circumstances to consider, providing a plain English tax summary in the offer letter will help to ensure  employees are aware of their potential tax consequences and obligations before they choose to participate in the programme.
2. Provide a tax briefing  prior to the time shares are issued
   It is becoming best practice to provide a summary (either written or verbal) to participants just before the time they are issued shares.  The taxing point (i.e. the time shares are received) should be transparently communicated to participants as well as illustrative examples of share price movements between share receipt and time tax is payable.

Employers need to be aware that employees may seek to sell all or some of their shares to cover the tax liability.

Undertaking these two steps can help ensure that the ESS is an effective motivational tool, rather than a tax nightmare.  

Please contact us if you would like support.