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In March 2022, the government announced reforms to make it easier for businesses to utilise employee share schemes (‘ESS’) and reduce the red tape so that employees at all levels can directly share in the business growth they help to generate. These changes include:

  • amending the disclosure rules, allowing unlisted companies to offer an unlimited number of shares, of an unlimited value, as long as the employee is not charged more than $30,000 a year for them (up from a $5,000 a year cap). Employees will also be able to accrue up to $150,000 over a five year period; and
  • for employee share schemes where there is no payment to participate, independent contractors will receive the same treatment and receive the same regulatory relief as employees and directors who are participants in the scheme.

Tax laws have changed as of 1 July 2015, making it considerably more attractive for eligible companies to issue options to employees under an Employee Share Scheme.

Phantom Share Schemes were a common alternative. They are still relevant for certain companies in certain circumstances. Please see my article on what is a Phantom Share Scheme and how does it work here, and my article on why you would implement a Phantom Share Scheme here.

This article looks at the tax implications of an Employee Share Scheme compared to a Phantom Share Scheme. Please note that this is not tax advice, and that both the company and employee should obtain their own tax advice beyond the general information provided in this article.

What is the tax treatment of an Employee Share Scheme?

Employees issued with options under a compliant Employee Share Scheme can defer tax until they exercise the share option to convert and realise financial benefits. Employees have up to 15 years to defer their tax liability. The taxing point will take place at the earliest of one of the following times:

  • When the employee ceases the employment in respect of which they acquired the right;
  • Fifteen years after the employee acquired the right; or
  • When there are no longer any genuine restrictions on the disposal of the right and there is no real risk of the employee forfeiting the right; or
  • When the right is exercised and there is no real risk of the employee forfeiting the resulting share and there is no genuine restriction on the disposal of the resulting share.

What is the tax treatment of a Phantom Share Scheme?

Phantom Share Scheme payments are treated like a cash bonus. The payments can be made:

  • regularly e.g. annually to track the dividend that the employee would have received if they were a shareholder; and/or
  • when the company is sold or listed on a stock exchange.

The payments are generally taxed when they are made as ordinary income to the phantom shareholder. The payments are generally deductible to the employer, like salary payments.

Conclusion

LegalVision can assist you to establish an employee share scheme or a phantom share scheme. Contact LegalVision’s taxation lawyers on 1300 544 755 or fill out the form on this page. 

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