Over the past 12 months some executives may have experienced a drop in company share prices that has left them with considerable tax impacts including a tax bill that consumes around three quarters of the gross value of their ESS. While nobody wants to pay tax, having a healthy expectation that fluctuating share values will likely create a tax implication enables preparedness, which may include an opportunity to sell shares at the time of vesting to pay the future liability.
Company share price fluctuations are to be expected, which can affect both the value of your ESS and the amount of your tax liability. In some instances, an executive’s ESS tax obligation created when their shares vest, can be greater than the value of the ESS when it comes time to paying your bill.
Rather than accept what can be significant tax ramifications, there are strategies that can be implemented to make the most of your ESS.
Shares awarded under an ESS generally have a taxing point at the time of vesting and whether you decide to retain the shares or sell them, the vesting results in assessable income and a tax liability for the financial year in which they vest.
For those who live and work overseas, in countries such as Canada and the United Kingdom, withholding tax is levied by the tax authority at the time of vesting. It requires the employer (through the share scheme provider) to sell vested shares and remit this amount to the relevant tax authority.
This also usually applies where you are working on overseas secondment or you’re subject to your company’s tax equalisation policy, meaning at the end of the financial year, your tax liability from the vesting of your ESS has been catered for.
However, here in Australia the tax liability sits with the employee.
Depending on your circumstances, it could also be appropriate for some of the vested shares to be held in superannuation or a trust where dividends and capital gains can enjoy a more tax efficient environment.
For example, tax on dividends within the superannuation environment is a flat 15%, whereas high earning executives will likely pay personal tax that’s as much at 45% plus 2% Medicare Levy.
Similarly, there may be opportunity to transfer a number of shares to a no-earning or low-earning spouse who enjoys a lower personal tax rate than yourself.
For high earning, hardworking executives, it’s understandably disappointing when you are subjected to a significant tax liability.
Unfortunately, the nature of your work situation is that you often have little time for your personal financial matters, especially those that are highly complex in nature.
Rather endure the same mistake again, make the decision now to implement ESS strategies in advance that can ease the burden of a large (and unnecessary) tax bill.
The key is to be tax-wise and organised.
Executive share scheme compliance is complicated and involves an enormous amount of record keeping that must be kept in a manner that is acceptable to the ATO. It is necessary to keep ALL documentation relating to the established cost base of vested shares. For time-poor executives this can be a significant challenge.
Further, for some executives, rather than having a diversified financial plan, they rely solely on their ESS for future wealth generation. This is all good when share prices are sound, but you could be left financially exposed should things change.
For example, a company could experience difficulties affecting their share price that may not be of their own making. This was evident during Covid in 2020 when the market fell, even for companies that weren’t otherwise negatively affected.
Next Steps
Qualified ESS financial planning can place you in an informed position for making the decisions that are right for you at the time of each vesting. It can also deal with the heavy lifting of managing your ESS and overall financial circumstances.
For navigating fluctuating company share prices, tax implications and your ESS consider these three steps:
Be proactive:
Largely once your shares vest and have a future tax obligation. The key is to implement tax and financial planning strategies well before your shares vest.
Keep thorough records:
Should you decide to self-manage your ESS, you will need to dedicate time to understanding ATO compliance, knowing when your shares vest, calculating your tax payable at the vesting point, and keeping precise paperwork for ATO scrutiny.
Engage an ESS strategist:
While the science of ESS may be within your grasp, having the time to manage your ESS and implementing tax effective strategies may well be beyond your reach.
May I suggest you engage someone like me – a qualified financial planner and ESS strategist – who can implement systems, establish historical documentation and strictly maintain ongoing transaction records necessary for meeting ATO compliance.
Your endgame should be to avoid paying more tax than you should and making the most of your high income through implementation of strategic wealth management options.
To learn more about ESS strategies, navigating drops in company share prices and tax impacts, please contact James Marshall on +61 (0) 7 3007 2080 or email contact@executivestrategies.com.au
To learn more about James, visit this link.
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.
