Executive Share Schemes (ESS) have inherent complexity which is exacerbated when an employee has unvested performance shares and then has their position made redundant or takes a voluntary redundancy.
Often the dominant feature of an executive’s personal prosperity, effectively managing ESS and the often-complex tax obligations is fundamental to achieving financial outcomes, especially in redundancy circumstances.
It’s for this reason specialised ESS financial advice is required as it considers the very specific tax ramifications in context of an individual’s overall financial plan. It’s for this reason we collaborate with specialised ESS tax advisers to ensure our clients benefit from properly coordinated and integrated advice.
As difficult as navigating ESS can be, the key is to tackle it head on so you are fully informed and able to make important decisions. The alternative, will be a failure to understand and meet your obligations to the Australian Tax Office and international tax authorities which has the potential to be financially detrimental and stressful.
In terms of redundancy, the treatment of your awards can be further complicated if you have worked overseas for a period of time that fell between when your award was granted and when it vests (or is exercised).
Depending on whether you were outbound from, or inbound to Australia, it will be treated differently.
You could incur a pro-rata tax treatment of the award in Australia, that reflects your Australian service and a pro-rata tax treatment of the award in a foreign tax jurisdiction (that depends on your foreign service period/s); or you could incur the full value of the award taxed in Australia with a credit applied for the foreign tax payable on the award vesting (or being exercised).
An additional complication relates to performance awards which can create an additional requirement of adding performance tests to the time-based vesting period.
For this award type, consideration needs to be given to the tax implications of future performance test periods along with any pro-rata impact on the number of shares or rights as they apply.
As each tranche of performance tested awards vest, taxable income is created and of course, this creates assessable income which must be declared often via multiple tax return amendments for the financial year when your role was made redundant.
The date at which your awards are taxable is usually the date your employment ceases. You will then need to record the income at each performance test date.
That is, an award with a performance test date in a time period usually between 12 and 60 months of your current year’s ATO tax return, will need amending once your future performance test conditions are met and your assessable income is known.
To avoid any adverse tax outcomes, it’s important to have a thorough understanding of not just your current, but the future, ESS circumstances.
Understanding how performance tested awards create taxable income will enable you to fulfil your tax obligations, ensure you only pay as much tax as necessary so you may enjoy your full ESS entitlement.
When redundancy is the reason for leaving employment, most employees are considered ‘good leavers’ and your employer will comply with the ESS plan and company rules.
That being the case, unvested executive share scheme awards are generally reduced by the pro-rata number of service days that have not been served with the company during the period from grant to vest. Therefore, if prior to your redundancy you served half of your vesting period and you were then deemed a good leaver, you would most likely receive 50% of your award at vesting.
Pro-rata awards usually vest on the cessation of your employment as well, so again it is at that point, the value of your awards is reported as income on your Australian tax return.
ESS is complicated at the best of times and redundancy conditions can add an additional and significant layer of complexity. In my experience, even the most astute of ESS holders struggle to understand and find the time to properly manage their ESS.
Your first step is to get specialised advice, and the second is to be vigilant and meet each compliance requirement on time.
Advance planning will help you to create clear expectations, particularly with regard to any tax that might be payable and when it’s due. This will allow you to plan and minimise disruption of your lifestyle cash requirements.
To discuss your ESS circumstances or to find out more about support for executives managing their ESS, please contact James Marshall, Financial Adviser and ESS Specialist on +61 7 3007 2080.
Executive Strategies is a specialised information hub for executives and senior managers who may have founded their own business or who work for growing private, ASX listed companies or government businesses. Its purpose is to provide access to specialist advisers and information that addresses the often-complex issues affecting their personal prosperity.
Stratus Financial Group and its advisers are Authorised Representatives of Fortnum Private Wealth Ltd ABN 54 139 889 535 AFSL 357306. This is general advice only and does not take into account your objectives, financial situation or needs, so you should consider whether the advice is relevant to your personal circumstances. You should also read the relevant Product Disclosure Statements (PDS) before making any financial decision.
Please note: Tax advice and other services not offered under the Fortnum Private Wealth AFSL are referred to appropriately qualified professionals.