Employee share schemes

Understanding your options

An employee share scheme is a common employee benefit in Australia. It can be an effective way to attract and retain talented workers, while aligning employee interests with those of company shareholders.

The scheme might offer shares as part of your salary package, or offer you the opportunity to buy shares, potentially through a loan that the company provides. For many people, this is the first investment in equities they will make and there are a number of important considerations before deciding to participate in an employee share scheme.

Worked example: things you may want to consider when entering into an employee share scheme

Michael joined the technology company, Smith and Taylor, in January of the relevant tax year. As part of his salary package, he was offered the ability to purchase $1,000 worth of shares through a salary sacrifice arrangement.

Under the terms of the employee share scheme, the shares are purchased without brokerage, at a volume weighted average price at a future date. If Michael bought the shares on the Australian Securities Exchange (ASX), he would have to pay the market price, as well as brokerage. By participating in his employee share scheme, concessional tax treatment may be available to Michael.

After thinking through the pros and cons of participating in the employee share scheme, Michael decided to seek independent financial advice before making a decision.

Things to know about employee share schemes

• Shares purchased through an employee share scheme are usually purchased free of brokerage, however shareholders may need to pay brokerage if they decide to sell their shares in the future
• Depending on the type offered by the company, the discount income amount of any shares acquired under an employee share scheme will either be taxed at the time the shares are granted or may be deferred so that any tax is payable at a later point
• Subject to meeting certain conditions of an employee share scheme, a concession may apply where employees can reduce their taxable discount income by $1,000
• Certain companies have performance targets which must be met before shares become available to employees through an employee share scheme
• Tax concessions may be available where shares are held for a certain number of years after acquisition
• A tax-deferred employee share scheme may be available up to $5,000 per tax year through a salary sacrifice arrangement (subject to certain conditions being met).

You should seek independent taxation advice specific to your circumstances, before entering into an employee share scheme.