Shares awarded under an Executive Share Scheme (ESS) have a taxing point at the time of vesting. Whether you retain the shares or sell them, the vesting of your employee shares results in assessable income, which as far as the ATO is concerned, creates a tax liability for which you are responsible.
If ignored, you could find yourself with an unexpected tax bill or insufficient realised share value to cover it.
At the end of the financial year in which your shares vested, you will have a tax liability you need to pay, and this requires planning.
That is, if you retained your shares on vesting, and the share price falls significantly, you may be placed in a situation where the share value is insufficient, leaving you unable to meet your tax obligation.
For under-the-pump executives, finding time to fully understand the tax obligations of your ESS is difficult. However, the alternative of not planning to meet your tax liabilities can adversely affect your overall personal financial circumstances.
And the key is being financially organised.
It’s important to retain all documentation supporting the establishment of the cost base of the vested shares.
Inadequate documentation usually leads to a costly and time-consuming process of re-establishing historical cost bases which are necessary for understanding capital gains tax implications among other matters.
Apart from the unnecessary expense of re-establishing documentation, it’s an ATO requirement that records are kept of every transaction, event or circumstance that may be relevant to working out whether you’ve made a capital gain or loss. [1]
As a qualified financial planner and ESS strategist, my experience with clients is they often don’t have effective systems in place for capturing and managing this documentation. Nor do they have the time to properly attend to the obligations associated with their ESS.
For executives working overseas or on secondment in a foreign country, the vesting and/or exercise point may result in significant tax liabilities and consequences across multiple foreign tax jurisdictions.
While on assignment overseas, executives may also be subject to their company’s hypothetical withholding policies, which require specialist navigation to ensure the resulting shares from vesting are accurate. Further, coordination between an expatriate’s corporate-appointed foreign tax adviser, Australian tax adviser and financial adviser ensures the wealth implications of the shares are fully understood and appropriate strategies can be implemented.
The good news is, as specialists in this area, my team and I have both expertise and systems for recording all the relevant documentation necessary for maintaining accurate cost base information.
Then as we are fully apprised of the implications and options available, we’re able to advise our clients appropriately.
In my experience, clients who have access to the type of specialist advice we offer are better able to accurately understand their options, plan accordingly and avoid set-backs that can include paying more tax than necessary or not being able to fund their tax liability.
To find our more, please contact James Marshall on +61 (0) 7 3007 2080 or email contact@executivestrategies.com.au
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 ABN 54 139 889 535 AFSL 357306. This advice is general and does not take into account your objectives, financial situation or needs. You should not act on it without first obtaining professional financial advice specific to your circumstances.
*Please note: For advice and services relating to this matter that are not offered under the Fortnum Private Wealth AFSL, in accordance with our collaborative advice model, when required, such matters are referred to appropriately qualified professionals.
[1] https://www.ato.gov.au/General/Employee-share-schemes/Employees/Record-keeping/
