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Phantom Share Schemes (PSSs), also known as Share Appreciation Rights Plans (SARs) or Share Tracker Plans (STPs), are contractual rights for an employee to be paid a certain amount based on an increase in a company’s share price or value. This much simpler plan is less expensive to implement and the treatment of taxation is less complicated compared to employee share schemes. Moreover, unlike employee share schemes, employees do not receive interests or own any shares in the company.

Implementing a PSS

As PSSs do not grant employees rights to interests or shares in a company, they are relatively easy to set up. Such PSSs are often profit sharing or improvement sharing schemes and hence are often added as an addendum to an employee’s terms of employment. There are low administrative costs in running a PSS, as payments are attached to an employee’s pay.

Under PSSs, as there are no equity interests being issued or transferred, there are no limitations on the profit sharing received by the employee. PSSs are tied to an increase in the real share price, whereas most ESSs are tied to vesting or realisation dates. When the employee receives a payment under a PSS, tax is simply deducted under the PAYG system.

Tax Treatment of PSSs

Phantom shares are treated as a cash bonus deferred until the future. When the future time or event is reached, such as the cessation of employment, the phantom share scheme pays out an amount to the phantom shareholder. When the payout is made, it is taxed as ordinary income to the phantom shareholder (without any tax concessions) and it is deductible to the employer.

Differences to an Employee Share Scheme

An Employee Share Scheme, also known as an Employee Share Option Plan (ESOP), is a scheme where employees are provided with shares, stapled securities or rights to acquire shares (known as ESS interests) in relation to their employment. ESSs are more sophisticated and complex to setup. A number of key legal documents are required to be drafted, including a Letter of Offer and a summary of the Employee Share Scheme. There are also higher administrative costs in running an ESS as a result of ongoing reporting requirements of schemes, particularly if there are vesting requirements to be met.


LegalVision can assist you with setting up a phantom share scheme. LegalVision has a team of great lawyers experienced in setting up PSSs who can assist you. Please call our office on 1300 544 755 and our Client Care team will happily provide you with an obligation-free consultation and a fixed-fee quote.

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