Tax Treatment on Australian Employee Stock Options
Employee Share Schemes (ESS) enable employees to buy shares of the company they’re working for at a discounted price. Alternatively, employees may choose to buy stock options which give them the right to buy or sell shares at an agreed price and date. Regardless of the scheme offered, employees are eligible for tax concessions.
Stock options granted after July 2015 are still subject to income tax when the option is exercised. No tax is enforced on the grant date of the ESS, assuming the taxing point is deferred to the vesting or exercise dates.
Options granted prior to the July 2015 ruling are likely to be taxed on the vesting date. If applicable, the payable tax will be computed using the shares’ market value at vest.
Tax is paid upon assessment of annual income tax return. Reporting of employee tax returns must contain the total taxable amount, especially when there’s no Real Risk of Forfeiture on the option.
Whenever an employee’s entitlement to ESS interests has restrictions on disposal or is subject to Real Risk of Forfeiture, the tax is deferred to whichever of the following situations come first:
- The Real Risk of Forfeiture is no longer in effect and the restrictions on the disposal are gone
- When an employee ceases employment or is terminated from a corporation
- Taxation is deferred for up to 15 years, provided the employee satisfies certain conditions under the Real Risk of Forfeiture
If the employee disposes the interest within 30 days from the exercise or vesting date, the deferred taxing point is moved to the time of the disposal. There is no gain on the sale as the market value of the interest at the deferred taxing point is used to calculate the assessable income of the employee.
Qualified stock options will be taxed upon the sale of shares, and Capital Gains Tax (CGT) will be computed accordingly. Employees who hold their shares for more than 12 months are eligible to benefit from having only 50% of the capital gain counted as the taxable amount.
Employees can receive up to a tax-free discount of 15% on shares purchase. Up to $1,000 worth of shares can be granted a tax-free benefit each year, so long as the employee meets the requirements of the income test and passes other eligibility criteria stated in the ESS.
Although there are no social security taxes enforced in Australia, employees may have to contribute to the Medicare Levy and pay for surcharges when the stock option is taxed.
Corporate tax deductions are only applicable if the issuing Australian company incurs an actual loss. The loss must relate to the conditions for granting the ESS. Documentation on recharge arrangements should be in place to avoid confusion.
The tax rules on ESS applies to employees who are Australian residents from the time the option is granted up to the moment the shares are sold. Special rules apply to non-residents and internationally mobile employees. Companies offering ESS to these types of employees must devise a way to ensure compliance.