Employee Share Schemes (ESS) are like the cherry on top of your job package. They’re designed to incentivise you to remain with the company you work for, and they can be a great way to grow your personal wealth.
But here’s the catch: no two ESS setups are the same—every company has its own version, each with its own rules, benefits, and tax implications.
So, while I can’t cover every single scheme out there, I can share some golden nuggets of wisdom from years of helping clients navigate their schemes.
Common Types of Employee Share Schemes (ESS)
Before diving into the key considerations of ESS, let’s break down some of the most common schemes you might encounter:
Matched Shares : The company provides additional shares for every share you purchase, often with a vesting period. For example, buy one share, and the company gives you one, subject to remaining employed for a certain period.
Shares Purchased at a Discount: You buy shares at a price below their market value. Acquiring the shares for less than they are worth gives you a potential boost to your wealth when the shares vest.
Share Options: Instead of shares, you receive the right to buy shares at a specific price in the future, often below the market value. These options may be subject to vesting conditions or performance targets before they can be exercised.
Performance-Based Shares (Remuneration): Shares are provided as part of your pay package or as a bonus, but they only vest if specific targets (such as revenue goals or individual performance metrics) are met.
These are just some of the ESS arrangements I see most often, but there are many others, each with its own incentives, timelines, tax implications, and risks.
One term I’ve mentioned a few times already is vesting, and that’s because it plays a major role in most ESS arrangements. So, let’s break it down.
Let’s Talk About Vesting Periods
Okay, so you’ve been offered shares. Awesome, right? But here’s the thing—they might not be yours straight away. That’s where the vesting period comes in.
Generally speaking, if you purchase shares, they are yours immediately. But if you receive additional shares from the company—whether through matching, a bonus, or remuneration—they are usually subject to a vesting period.
How Vesting Works:
- Grant Date: This is when the company says, “Hey, we’re giving you these shares.” But it’s more of a promise than a gift right now.
- Vesting Period: This is like the company saying, “Stick with us for a bit, and these shares are yours.” It’s almost like they are keeping the carrot dangled on the end of the stick for a period of time. It’s usually between 1 to 3 years. Some schemes also include additional requirements, like hitting performance milestones, which are more common in executive roles.
- Vesting Date: Once this date rolls around, the shares officially become yours. You can keep them, sell them, or just admire them because you now own part of the company that you work for.
Pro Tip: If you receive matched shares, the shares you purchase are yours immediately, but the matched shares will be subject to the vesting period. If you sell your purchased shares before vesting, you will lose the matched shares.
The Tax Trap
Now, let’s talk about tax. Pay attention to this bit—because it’s one of the most common ESS traps that can catch people off guard.
If your shares are subject to a vesting period, then when they vest, some or all of their value will be assessable income, depending on your ESS arrangement.
Three Common Tax Scenarios for ESS:
- Shares Purchased at a Discount: If you purchased shares at a discount, the ATO will tax the difference between the market value of the shares on the vesting date and the amount you paid for them. This discount is considered assessable income. For example, If the market value of the shares on vesting is $10,000 and you paid $6,000 for them, $4,000 is added to your taxable income. This is normally where share rights are issued.
- Company-Matched Shares: If the shares are matched by your employer (i.e., you didn’t pay for them), the entire market value of the matched shares on the vesting date is taxable as income. For example, If the market value of the shares is $10,000 and they were fully matched by your company, the full $10,000 is added to your taxable income. Importantly, the shares you purchased to qualify for the match are not taxable—only the employer-matched portion.
- Gifted Shares: If shares are given to you as part of your employment agreement or bonus, then 100% of the shares value at the vesting date is considered taxable income. For example, if you receive $5,000 worth of shares as a bonus, the full $5,000 is added to your taxable income at vesting.
The PAYG Trap: Unlike salary income, no tax is withheld upfront for vested shares. This means when tax time rolls around, you could be hit with a big tax bill unless you plan ahead.
Capital Gains Tax (CGT) on ESS Shares
When you sell your shares, Capital Gains Tax (CGT) applies to any increase in value from the cost base.
- For discounted shares, the cost base is the amount you paid + the taxable discount at vesting.
- For matched or gifted shares, the cost base is the market value at the vesting date.
Pro Tip: If you sell your shares within 30 days of the vesting date, the taxing point shifts to the sale date, meaning CGT won’t apply, but the income tax liability remains.
The Guided Investor Approach
Employee Share Schemes can be a fantastic tool to build wealth, but they also come with risks—especially if you tie up too much of your money in a single company (which also happens to be your employer).
At Guided Investor, we typically recommend:
- Participating in ESS where the incentives are favorable, and the company is solid.
- Planning for tax consequences and developing strategies to mitigate tax liabilities before vesting.
- Where possible, diversifying investments by selling vested shares where appropriate to reduce concentration risk and reinvesting elsewhere.
By taking this approach, you can maximise the benefits of ESS while managing risk and tax implications strategically.
