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Payroll

Employee Share Scheme

By QuickBooks Australia

May 7, 2024

What Is an Employee Share Scheme?

An employee share scheme (ESS) is an incentive used to reward existing employees and attract new talent. It is otherwise known as equity schemes or share purchase plans. An employee share scheme provides employees with an opportunity to invest in the company they work for.

Employees who participate will effectively purchase shares in the company. Their shares are tied directly to company performance. This means their work performance has a direct impact on the value of their shares. Beyond that, the company's overall performance dictates the value of the share, which creates a motivated team of people to perform and produce.

The key to making employee share scheme decisions – is to get a deeper understanding of the pros and cons of participation. You need expert advice to guide you in choosing the correct scheme in understanding the terms and conditions of employment, the onboarding process, and employee share scheme tax information.

Share Schemes Explained

An employee share scheme provides your employees with an opportunity to purchase shares in the company. There are a variety of ways in which these shares can be purchased. Employees can purchase via salary sacrifice for a set period. Alternatively, they can purchase from their own pocket upfront, via a special employer loan, or via dividends on shares they may already own.

Typically these schemes have limited lifespans, generally between two and fifteen years. If both parties follow the special tax rules there are tax concessions to ESS interests. To ensure you benefit from these interests you need to meet the Income Tax Assessment Act 1997's Division 83A conditions. There are obligations employers must meet, especially if employees offer an employment share scheme discount. ESS tax rules do not apply to shares purchased without a discount. Additionally, there are different sets of tax rules that apply to shares purchased before 1 July 2009.

As an employee, you are an employment share scheme participant if you have been given shares in your company, whether at a discounted price or others. Or, you have an option to purchase shares. Tax concessions will depend on the type of employee share scheme you are involved in and when you purchased the shares. Though you aren't taxed on the discount shares, you may be required to pay capital gains tax.

When employees file their tax returns, they can record employee share scheme discounts. Use the ESS statement provided by your company and ensure all of the information you input is consistent with the statement.

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Pros & Cons Of Employee Share Schemes

The Pros For Employers

Improved Performance

Employee share schemes are a powerful way to improve performance and increase productivity. When your team has the opportunity to earn or purchase shares it makes them an investment partner, which enables them to take a more active role in the company’s success, as their share value is intrinsically tied to overall company performance and their own performance. Employees will often work harder to ensure the company succeeds when they have more investment motivations. In addition to attracting top talent, it also encourages employees to stay with your company.

The Pros For Employees

It might be your first opportunity to own shares and start your investment journey.
When the company succeeds, you benefit.
You can often purchase shares at a discount.
You may not need to pay a fee when you sell the shares.
Depending on your financial situation and the scheme, you may get tax benefits.

The Cons For Employers

Tax Implications

ESS interests can come with tax implications. When an employee chooses to participate in an employee share scheme it's generally at a discounted price. They wait for the vesting period and purchase the shares (in turn, taking ownership of the shares). Those shares then, depending on the scheme, are subject to taxes. It's important that you carefully select your employee share scheme to limit tax implications for employees.

The Cons For Employees

If you choose to purchase through your employee share scheme, you are tying additional investment to that company meaning an investment stream and salary are linked to individual company performance. There are limitations set on selling and buying the shares.
You might not be able to sell them when you leave; you may need to return them to the company.
You could lose out if the company closes down or the shares drop in value.

How Is An Employee Share Scheme Taxed?

When setting up your own employee share scheme, consider the options available, vesting periods, exercise price, disposals, and eligibility criteria. These are key considerations for both employers and employees.

As an employer with an employee share scheme, you must provide your employees with an accurate ESS statement by 14 July each financial year. You have until 14 August to electronically submit your ESS statement to the ATO. With Single Touch Payroll, the process is simple. Once you have your cloud payroll software up and running it does all the hard work for you.

Complete new employees forms, add information including their Australian employee identification number, tax file number, and move them through your onboarding program.

With QuickBooks Payroll powered by Employment Hero, tax returns are less complicated since it guides you through the process for quick and easy tax filing. So why not try for free for 30-days and experience how to make tax season hassle-free?

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Employee Share Scheme

What Is an Employee Share Scheme?

Share Schemes Explained

Grow Your Business with QuickBooks

Pros & Cons Of Employee Share Schemes

The Pros For Employers

The Pros For Employees

The Cons For Employers

The Cons For Employees

How Is An Employee Share Scheme Taxed?

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