Frequently asked ESO questions by employees
Substantial changes to the taxation laws governing employee share schemes have been announced in the 2008-09 Budget. These changes are not reflected in the information provided on this site or in the 'Getting Started' kits. You should therefore seek information and advice from a suitably qualified tax professional.
What is an employee share ownership plan (ESOP)?
An employee share ownership plan (ESOP) is a scheme that provides employees with a financial share in the business they work in. ESOPs allow employees to gain shares (or options to shares) in the company they work in so that the employees benefit financially when the business performs well.
ESOPs are introduced for a variety of reasons. A common goal in introducing an ESOP is to align employee/employer interests to motivate and retain valued employees. ESOPs can take many forms, depending on the business size and type, and the aim for introducing the plan.
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Why should I participate in an employee share ownership plan (ESOP)?
It is up to you to decide whether or not you participate in an ESOP offered by your employer. However, as an employee you may benefit from participation in an ESOP in a number of ways.
Some of the benefits may include:
- greater job satisfaction through receiving concrete rewards for your performance
- a feeling of ‘ownership’ of the business – a degree of participation in the company and a voice in the business as a shareholder
- a tax efficient way of acquiring shares and the opportunity to earn a substantial capital sum. You may also gain a greater understanding of the stock market and factors that influence the performance and prosperity of the business
- increased flexibility and choice when negotiating workplace arrangements
- the feeling of a stronger connection with your workplace.
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Who can participate in an ESOP?
All employee share ownership plans are unique to the business that they are operating in. Some businesses run a number of employee share plans that are aimed at different groups of employees.
To find out the specific terms and conditions of the plan/s on offer at your workplace, including who is eligible to participate, you should speak to the appropriate person in your business for information.
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What should I consider before signing up to an employee share ownership plan (ESOP)?
Clearly the cost (if any) of purchasing the shares will be a consideration when you are considering whether to take part in the ESOP offered by your workplace. In addition to the cost, the matters you should also consider are:
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Tax benefits and obligations
There are tax implications to acquiring shares, even if the shares are given to you as a bonus or incentive. The tax implications depend on the terms and conditions of the plan you are participating in. This also applies to options and units provided through a trust. It is important that you obtain appropriate advice and understand the benefits and obligations under any ESOP offer before accepting it!
Investment risks
Remember that there are risks involved in investing in shares. While share prices can go up, they can also go down. In the worst case you might lose your entire investment in the shares. This is an important consideration if you are thinking of taking part in a plan that involves an employee loan (without downside risk protection) to purchase shares, or sacrificing salary to receive shares, irrespective of any discount or matching offer inducements.
Change in control
You need to be clear from the outset as to what happens with your shares/options if the business is sold or restructured and you continue on as an employee in the new business.
Retirement, retrenchment, resignation
You need to understand clearly from the outset what happens with your shares/options when you leave the business or the plan in these circumstances.
Death and disability
You need to understand clearly from the outset as to what happens with your shares/options when you leave the business or the plan in these circumstances.
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Will it cost me anything to participate in an employee share ownership plan (ESOP)?
The costs associated with participating in an ESOP depend on the type of plan you are participating in, and the specific terms and conditions outlined by your employer. Most ESOPs are offered with supporting reading material such as plan booklets, Q&As, taxation summaries etc. If in doubt about your rights or entitlements you should contact the appropriate person in your workplace, usually referred to in the plan booklet.
Generally shares or options are allocated in one of the following ways:
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in addition to your salary (incentive offers) – possibly linked to your individual performance/time service or the performance of the business
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in lieu of salary (salary sacrifice offers)
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as part of your remuneration arrangements, as a trade off against other benefits under an Enterprise Bargaining Agreement or individual contract
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through a loan plan – employees buy shares through a loan scheme run by their employer (often shares are offered at a discounted price, with interest free loans and downside risk protection).
If you are allocated shares or options, as a performance bonus, or in exchange for part of your wage or salary, you still need to ask about the tax implications of participating.
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What do I need to know in terms of tax?
Any ESOP benefit received will have taxation implications to consider. In simple terms, you will need to understand:
- the nature of the benefit you are receiving, for instance, whether the benefit is assessable for taxation immediately or at some time in the future, or both
- how the value of benefit is calculated
- whether the benefit is to be taxed as a capital gain or ordinary income.
The ESOP information booklet you receive with any offer will usually provide some general taxation information for you to consider, however, because personal circumstances impact on most taxation events, you may need to consult a qualified tax advisor to ensure all aspects relevant to your personal circumstances are dealt with before any offer is accepted.
For further information on employee share ownership taxation see the Australian Tax Office (ATO) website or phone the ATO on 132861.
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What is the structure of my investment?
There are many ways an ESOP can be structured. For instance, you could be offered a right to a share (option), a direct share or an interest in a share through a trust.
The offer documentation should make it clear what you are applying for or accepting and what your rights, entitlements and obligations are in respect of your ESOP participation.
What do I have to do to be eligible for the available tax concessions?
One of the primary taxation concessions provided for in the taxation legislation is the tax exempt benefit of up to $1000. Where the exempt share benefit is available the amount of tax paid on shares of up to $1000 value is nil. In order to receive the share benefit 'tax free', the share plan must first meet certain conditions, and in addition, the taxpayer must make an election to be taxed on the benefit in the year of receipt. This election is required in terms of Section 139E, Division 13A (ITAA). The election notice does not have to be lodged with the ATO, but must be held with the taxpayers’ records, as evidence of the election.
Any election made in respect of a share benefit affects all employee share benefits received that year. Where an election is made and an employee taxpayer receives more than $1000 worth of shares in that year, the excess will be included in the taxpayer's income and taxed in that year. An employee taxpayer who makes the election cannot also access the Deferred Share Benefit for any share benefits received in the same financial year. See ESOP taxation considerations – a guide for employers for more information.
The alternative deferred share benefit will be available automatically if the share plan offered meets certain conditions. No Section 139E election should be made to access this benefit.
For further information on employee share ownership taxation see the Australian Tax Office (ATO) web site or phone the ATO on 132861.
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Who do I contact and where do I go for more information?
All employee share ownership plans (ESOPs) are unique to the business that they are operating in. Therefore you should speak to the appropriate person in your workplace for information on the specific terms and conditions of your plan.
For general information on things to consider when deciding whether to participate in your workplace ESOP, you can go to Considering your ESOP offer - a guide for employees.
Please send an email to order a 'Getting Started' information kit.
DISCLAIMER
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