Employee Share Schemes: Understanding Your Obligations

At the end of the tax year, Australian employers have obligations towards the share schemes they offer their employees - what should you know?

Many Australian employers invite their employees to participate in an Employee Share Scheme (ESS) - which involves the opportunity to purchase shares in the company. This opportunity might be paid for through a salary sacrifice arrangement, through the dividends generated by the shares, or even paid for up front by the employee - it may even be the case that shares are available to employees at a discounted price. ESS can be extremely useful for employers, representing a way to attract and retain talent over the long term, and at the same time, align employees’ interests with those of shareholders.

If you are running an ESS, it’s important to remember that the schemes carry certain administrative and legal obligations - not least a complicated tax reporting process. As an employer, it’s vital you understand how to report the value of employee income generated by your ESS, and stay on the right side of the Australian Tax Office’s compliance regulations…

ESS and Payroll

Shares (or rights to share options and deferred rewards) are subject to income tax under Australia’s domestic laws. Reporting the income derived from an ESS can be complicated however, since it is not usually subject to the same Pay-As-You-Go tax withholding as regular income, and there is no function for employers to voluntarily withhold and remit tax to the ATO. If shares are reported through payroll, employers run the risk of reporting employee salaries and wages inaccurately on end of year PAYG summaries - so from a payroll perspective, it may not be advisable to conduct a separate pay run to cover that share income.

Given the issues with integrating share income into the payroll process, the ATO makes provisions for employers reporting the taxable value of shares issued to employees annually -  in the following ways:

  • Annual Reports: Employers should report the total taxable value of shares issued to employees in an ESS annual report. Annual ESS reports should be made by the 15 August after the end of the tax year.
  • Statements: Employers should report to their employees the taxable value of shares issued to them during the year in ESS Statements. These statements will allow employees to complete their own Australian income tax returns. ESS statements should be delivered to employees by the 14 July after the end of the tax year.

Lodging & Paying ESS Tax

The taxable value of employee shares should be included as income in employees’ annual tax returns. After the employee’s annual income tax return is submitted, ESS share liability should be paid as a lump sum.

Where the employee’s ESS tax has been withheld during the year, employees must also wait until lodgement of the employee’s personal income tax return before making tax payment. In these cases, to ensure accuracy, employers might consider offering support to their ESS employees when preparing their personal returns – so that the correct liabilities can be established.

The specifications for lodging ESS annual reports can be found online through the ATO website. Some employers may be able to use their ATO portal to lodge their ESS reports.

Planning Ahead

Don’t let the ESS reporting process lead you into a compliance trap at the end of the year. Be proactive: retain and review all records relating to share income, and ensure you understand the financial details of the reward arrangements you have set up for your employees. Supporting your employees and helping them prepare for their own reporting obligations should be a priority, so make sure you understand what they might need from you - including explanatory tax notes relating to their ESS statements and policies.

If you’d like more information about your compliance obligations, or any aspect of Australia’s payroll and tax landscape, check out our dedicated Australia Insight Guide today.