The vibrant start-up scene in Perth is thriving, with numerous businesses emerging as leaders in their respective industries. One of the key factors contributing to the success of start-ups is the ability to attract and retain top talent. An effective way to achieve this is through employee share schemes (ESS). In this article, we’ll explore how Perth-based businesses can leverage ESS to drive growth, and how a skilled tax accountant can help structure these schemes in the most tax-efficient manner. We will also delve into the crucial aspects of payroll tax, income tax, capital gains tax, and the reporting requirements for employees receiving shares.
Employee Share Schemes: An Overview
Employee share schemes allow employees to acquire shares or options in their employing company, aligning their interests with those of the business. This creates a sense of ownership and fosters long-term commitment, ultimately contributing to the company’s success. There are different types of ESS, such as:
- Share purchase plans: Employees purchase shares at a discount, often through salary sacrifice arrangements.
- Option plans: Employees receive the right to buy shares at a predetermined price (the exercise price) after a specified period or upon meeting performance milestones.
- Performance rights plans: Employees receive shares based on meeting predefined performance targets or KPIs.
Each type of ESS has its unique features, and the choice of the scheme depends on factors such as the company’s objectives, budget, and employee preferences. And if your ESS has offshore tax entities, or senior management located offshore, you will need to incorporate the impact of offshore taxation and its impact on your business.
The Role of Your Perth Tax Accountant in Structuring Employee Share Schemes
A well-structured ESS can have significant tax benefits for both the business and its employees. Your Perth tax accountant can help you design the optimal ESS to ensure tax efficiency, while complying with the complex regulatory requirements. They will guide you through the process of setting up the scheme and advise on issues such as:
- Choosing the most suitable ESS type for your start-up.
- Drafting the necessary legal documentation, including the plan rules and employee agreements.
- Setting vesting conditions to encourage employee retention and performance.
- Determining the appropriate valuation methodology for shares or options.
- Ensuring compliance with the Corporations Act and Australian Securities and Investments Commission (ASIC) requirements.
In particular, we often identify that the clear communication of the ESS to employees, and to the tax accountants engaged by the employees, is poor. This can result in a state of confusion among your team and a series of questions and ambiguity thrown at the administration and senior executive team and can drag on business resources and severely impact the cultural benefit of using an employee share scheme in the first place.
At Westcourt we focus on the upfront communication of employee share schemes to the team and providing incredibly simple clear instructions to the tax accountants engaged by the new shareholders so that confusion does not come at the organisation.
Payroll Tax Implications of Employee Share Schemes
Payroll tax is a state-based tax levied on the wages paid by an employer. Employee share schemes can have payroll tax implications depending on how the scheme is structured. In general, the value of the shares or options granted to employees is considered taxable wages for payroll tax purposes and will be taken into consideration when understanding how payroll tax is calculated in WA. However, some exemptions and concessions may apply.
Your Perth tax accountant can help you navigate the payroll tax complexities by:
- Assessing whether the ESS attracts payroll tax liabilities.
- Calculating the taxable value of shares or options, taking into account any applicable exemptions or concessions.
- Ensuring accurate and timely payroll tax reporting to avoid penalties and interest charges.
Income Tax Considerations for Employee Share Schemes
When an employee receives shares or options under an ESS, they may be subject to income tax. The income tax treatment varies depending on the type of ESS and whether the start-up qualifies for the specific tax concessions available under the start-up concession rules.
In general, employees may be taxed on the discount they receive when acquiring shares or options. However, the start-up concession allows eligible employees to defer the tax liability until they sell their shares or exercise their options. This concession can be particularly beneficial for start-ups, as it helps attract and retain talent by reducing the upfront tax burden on employees.
Your Perth tax accountant can advise you on the income tax implications of your ESS by:
- Determining whether your start-up is eligible for the start-up concession.
- Calculating the taxable discount for each employee.
- Advising on strategies to minimize income tax liabilities, such as implementing vesting conditions or performance milestones.
- Ensuring accurate and timely income tax reporting for both the company and its employees.
Capital Gains Tax and Employee Share Schemes
Capital gains tax (CGT) is a federal tax on the profit made from the disposal of a capital asset, such as shares. When employees sell shares acquired through an ESS or exercise their options, they may be subject to CGT on any capital gains realized. The CGT implications depend on factors such as the employee’s residency status, the holding period of the shares, and the availability of any CGT concessions.
Your tax accountant can help you plan for and minimize potential CGT liabilities by:
- Explaining the CGT implications for different ESS types and employee circumstances.
- Advising on strategies to optimize CGT outcomes, such as timing the sale of shares or exercising options in a tax-efficient manner.
- Ensuring that employees understand their CGT obligations and the importance of maintaining accurate records for tax purposes.
Reporting Requirements for Employees Receiving Shares
Employees participating in an ESS have specific reporting obligations to the Australian Taxation Office (ATO). These reporting requirements vary depending on the type of ESS and the employee’s tax residency status. In general, employees need to provide information about:
- The number and type of shares or options received.
- The date on which the shares or options were granted.
- The taxable discount, if any, and the method used to determine it.
- Any CGT events that have occurred, such as the sale of shares or the exercise of options.
Employees must include this information in their income tax return for the relevant financial year. The deadlines for lodging tax returns vary depending on the employee’s circumstances and whether they are using a tax agent to prepare their return.
Your Perth tax accountant can assist employees with their reporting obligations by:
- Providing guidance on the information that needs to be reported and the relevant deadlines.
- Helping employees understand their ESS-related tax obligations and the importance of maintaining accurate records.
- Preparing and lodging employee tax returns, ensuring that all ESS-related information is reported correctly and on time.
In addition to the reporting requirements to government you will also have reporting obligations to your new employee shareholders. So using cloud accounting solutions where you can give your senior management full, partial or limited access to financial information can be part of the strategy to engage your senior management with the ESS incentives.
Incorporating employee share schemes in succession
The use of an ESS can be a tool to effectively sell the family business to your senior management team. Alternatively, the ESS can simply be a way to engage the senior management team while allowing for key buyback events from your team (like resignation) so that you can continue with your long-term strategy of transferring the family business to the next generation.
If your family has also structured an ESS you should also consider the estate planning implications of the ESS to your family. This could include a review of your will, discussions among the family and structuring the ESS to consider key events like a change in control.
Employee share schemes are a powerful tool for Perth start-ups looking to attract and retain top talent. With the help of a skilled Perth tax accountant, you can structure these schemes in a tax-efficient manner, maximizing benefits for both the business and its employees. By understanding the implications of payroll tax, income tax, capital gains tax, and reporting requirements, your start-up can harness the full potential of employee share schemes, driving growth and success. Partnering with an experienced tax accountant ensures that your start-up remains compliant with complex tax regulations while optimizing the financial benefits of implementing an ESS.