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Participating in an Employee Share Scheme

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As an employee of a company, you may be invited to participate in an Employee Share Scheme. This is an exciting opportunity, but there are a number of things to consider before you dive in.

This module is intended to help you understand the basics of Employee Share Schemes:

What is a share?
What is an Employee Share Scheme?

How do they work?
Why has my Employer got one?
Should I participate in it?
What are the tax implications of participating?
What changes were announced in the 2009 Federal Budget?
How will these changes affect me?

 

What is a share?


A share is simply a part-ownership of a company. This entitles you, as a shareholder, to take part in the company's profits (usually via dividends) or losses, elect its board of directors and vote on major issues. Shares are also called ‘equities’ and ‘stocks.’

If you need to know what any other terms mean, please refer to the Glossary section of this website.
 
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What is an Employee Share Scheme?

An Employee Share Scheme allows employees to acquire securities (shares or rights) in the Company they work for. The securities are generally offered:
  • In a tax effective way;
  • At a discount to their market price; and
  • Without having to pay brokerage. 

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How do they work?

Employee Share Schemes can be very simple or complex. However there are usually four variables:

  1. The price at which you can purchase the shares or rights;
  2. The time you must wait before you can purchase the shares or rights and exercise the rights;
  3. The time you must wait before you can sell the shares or rights; and
  4. The performance hurdle(s) that must be achieved before you can purchase the shares or rights.

 
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Why has my Employer got one?


Your Employer uses the Employee Share Scheme as a way of attracting, retaining, and motivating staff. It aligns employees’ interests with shareholders’ interests, and employees can benefit financially if the company performs well. It can also allow employees to save on tax.

Studies have shown that employee share ownership leads to improvements in productivity and company performance.
 
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Should I participate in it?
 

Before making a decision about whether to participate in an Employee Share Scheme, there are a number of things to consider. For example:

  1. The strength of the company – Are the shares or rights likely to increase in value? Or is the company suffering?
  2. The advantages of the particular scheme – Are the shares or rights available at a discount to the market price? Can you achieve tax savings?
  3. Your personal financial situation – Are shares an appropriate investment for your risk profile? What are your money priorities at this time?

These are all important questions you need to answer before you participate in an Employee Share Scheme. If you’d like to talk to an expert, who can help you determine what to do in your particular situation, call us on 1800 046 144 or email us.
 
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What are the tax implications of participating?

The tax implications of participating in an Employee Share Scheme can be complex. If you’d like to talk to someone about your particular situation, call us on 1800 046 144 or email us.
 
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What changes were announced in the 2009 Federal Budget?

In the 2009 Federal Budget, the government announced changes to the income tax concessions available to participants in Employee Share Schemes.

Employee Share Schemes – election requirements
The first change is to the election requirements to access one of two tax concessions available to taxpayers who acquire qualifying shares or rights under an Employee Share Scheme. This change improves the integrity of the law by ensuring taxpayers appropriately report income in their tax returns.

The election procedures have changed so that a taxpayer who wishes to make an election to be assessed under the taxed-upfront concession, must make the election and include the value of the discount in their income tax return for the year of income the shares or rights are acquired. If the value of the discount is $1,000 or less, and the taxpayer is eligible for the $1,000 exemption available under the taxed-upfront concession, the taxpayer will be taken to have made the election.

If the $1,000 exemption does not apply, or the value of the discount is more than $1,000, taxpayers will be taken to have chosen to be taxed under the tax-deferred option if:
 
  • they do not make an election in the income tax return in the year the shares or rights are acquired; and
  • they do not include an amount in their income tax return in the year the shares or rights are acquired.

The change removes the ability for taxpayers to manipulate the taxing point and ensures that discounts provided on shares or rights under an Employee Share Scheme are properly included in their assessable income.

The measure takes effect with respect to shares and rights acquired from 1 July 2008 for the 2008–09 income year.

Employee Share Schemes – prevention of double taxation
The second change is to remove double taxation that arises in relation to certain employee share schemes that use an employee share trust.

Double taxation is removed by providing the trustee (or beneficiary) of the employee share trust with capital gains tax (CGT) relief when a beneficiary, on exercising rights, becomes absolutely entitled to the shares held in the trust.

Prior to this change, CGT relief in relation to shares held for the purpose of satisfying rights acquired by a beneficiary under an Employee Share Scheme did not extend to a trustee of an employee share trust.

The changes apply in relation to CGT events occurring from 7.30pm (AEST) on 13 May 2008.

These changes are now law.

The tax implications of participating in an Employee Share Scheme can be complex. If you’d like to talk to someone about your particular situation, call us on 1800 046 144 or email us.
 
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How will these changes affect me?
 

The tax implications of participating in an Employee Share Scheme can be complex. If you’d like to talk to someone about your particular situation, call us on 1800 046 144 or email us.
 
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