Solving the ESS vesting dilemma for executives with US tax residency

Regulatory requirements by US-based FINRA have meant executives, including contracted or non-employed executives with US tax residency, have not been issued their vested shares.

Mining and resources companies are having difficulty (or are unable) to issue vested shares to US tax residents for no reason other than a requirement by FINRA, the US-based Financial Industry Regulatory Authority, limiting transactions to registered FINRA members only. Read on to learn more…

Executives with US tax residents

FINRA has created quite the dilemma for mining companies and their executives as stocks and vested shares form a key part of senior employee and contracted executive remuneration which generally have strict tax compliance and obligations that must be met.

It’s taken quite a bit of working out, but I’m pleased to say there is a solution.

As it turns out, most of the key financial services platforms managing mining and resources company shares are not members of FINRA and by all indications have no desire to become one.

As a former mining engineer now a qualified financial planner and ESS strategist with over 25 years’ experience, I have a clear understanding of the issues and the urgency required for finding solutions for my clients and others who may find themselves in this situation.

To that end I’ve been working closely with Australian platforms and I’m pleased to report, one of our best has come to the party offering expertise and platform facilities that will enable vested shares to be issued to US tax residents.

However, the process is neither easy nor fast, currently taking around four weeks to implement.

Suffice to say, action is required and I invite mining and resources executives with US tax residency facing this situation to make contact now.

Contracted company executives

For company directors and executives who are contracted rather than directly employed by the company, they too have challenges affecting issued shares and options which fall outside the usual executive share scheme protocols.

Working in collaboration with Craig Barry, business advisor and tax specialist, we are assisting these individuals as well to implement their own solutions for tax-effectively receiving shares and options as part of their consulting/contracting fee.

According to Craig, while employed executives are often challenged by the complexity and vagaries of ESS tax compliance and strategies, for contracted or non-employed executives there is even less available in the way of strategy or planning.

“Contracted executives will need to consider the type of entity suitable for tax effectively holding shares and options which for some companies, particularly those in their infancy, as it could be years before the value of those shares are able to be realised.

“Effectively the receipt of shares, options or rights by non-employees in return for services rendered becomes a question of how to value the non-cash remuneration they receive as opposed to employees who also need to consider other issues, such as the timing of the tax event.  Non-employees are unable to rely on the valuation shortcuts available in the ESS regulations and as such, they will need to rely on determining the value of the shares and options using complex methods such as the Black-Scholes model or binomial modelling,” Craig said.

Craig also noted that not only are these valuation methods complex, they are also somewhat subjective.

“In my experience these methods usually result in higher valuation outcomes than those that might have occurred using the shortcuts in the ESS regulations and there is also less certainty as to whether the ATO will accept the resultant valuation,” he said.

Structuring the holding of the company interests

Mining and resources business leaders need to understand the types of entities available to them for holding the company such as shares and options offered as part, or full payment of consulting / contracting fees, and for purchasing shares if they wish to contribute to a company’s development funding.

Tax effective structures including holding shares in or buying them through a discretionary trust, investment company, in their spouse’s name or a superannuation fund are among the options to be considered and tailored to individual circumstances.

Next step:

ESS problem solving accounts for a significant portion of our Resources Unearthed purpose.  By nature they are complex, and for US tax resident affected by FINRA’s requirements and contracted executive or non-employee receiving company non-cash remuneration that complexity escalates.

For tax effective ESS solutions, I invite you to contact me on +61 (0) 7 3007 2080 email to request a call back.

To learn more about Brett Cribb, 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.

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