Implication of receiving shares under an Employee Share Scheme

Employee share schemes (also known as employee share purchase plans or employee equity schemes) give employees shares in the company they work for, or the opportunity to buy to shares in the company. Companies encourage employees to participate in employee shares schemes by offering them discounted shares or rights to acquire shares. The amount of the discount is treated as assessable income for tax purposes.

The discount you receive is worked out as the market value of the shares or rights less any money or other consideration you provided to acquire them. It is calculated at the date you acquired the shares or rights.

The key tax issues to be aware of are:

• You generally need to include the amount of the discount in your assessable income for the income year you acquire or receive the shares or rights (in some circumstances you can defer this until a later income year);
• Capital gains tax may apply when you dispose of the shares or rights. If you held the shares or rights for longer than 12 months you may be able to access the 50% general discount.

What can you expect from your employer?

Your employer will tell you if you are eligible to participate in an employee share scheme. They will also tell you whether the scheme meets the criteria for taxed-upfront scheme or tax-deferred scheme.

Your employer will give you an Employee Share Scheme Statement at the end of the financial year. The statement will detail all the shares or rights you acquired throughout the financial year. You will need to provide this statement to your accountant to assist in the preparation of your taxation return.

The government is currently reviewing the legislation on employee share schemes. There is speculation that they are close to finalising new legislation which aims to reduce the tax burden that employees are currently experiencing with the upfront taxing method.

We recommend contacting our office if you would like to discuss your specific circumstances or the new legislative changes.

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Division 7A

Division 7A prevents private companies from making tax-free distributions of profits to shareholders or to their associates. Tax-Free distributions can be in the form of advances, loans and other payments or credits to shareholders or their associates.

It is important to be aware that if a loan arises in the company it must be dealt with prior to the lodgement date of the following year’s income tax return. These loans can be dealt with as follows:

1. The total amount of the loan can be paid in full either by paying the amount of money back to the company, or by declaring a dividend for the amount of the loan balance to be shown as income in the tax return of the shareholder.  Preferably fully franked subject to availability of franking credits; or
2. Enter into a complying Division 7A loan agreement and make the minimum yearly repayment which can be made by either paying the money back to the company or by declaring a dividend as per above.  For the loan to be “complying” the interest rate must equal or exceed the ATO’s benchmark rate and the term of the loan must not exceed 7 years.  For the 2014/15 financial year the interest rate is 5.95%.

It is often easy to forget that a company is a separate legal entity to its owners and that by taking funds for personal use and not treating as wages or dividends can cause issues.  If you do wish to access funds, please call our office before proceeding and we can advise on the best way to record these for you.

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