You pay tax on Employee Share Scheme when the shares become unrestricted and vested. Many employees are confused about this because they don’t get taxed when the shares are initially issued. However, when the shares become unrestricted (usually when they vest), that’s when the tax obligation kicks in. Let’s break this down further.
When you receive restricted shares under an Employee Share Scheme (ESS), you typically don’t pay tax immediately because you don’t yet have full ownership rights. These shares are subject to certain conditions, such as staying employed for a few years or meeting performance goals before they “vest.” Once the shares vest, they become unrestricted, and you gain full control. At this point, they’re considered part of your income, and that’s when you’re required to pay tax.
My Payroll Said It Won’t be Taxed when they are Issued? The answer lies in the fact that the shares were not fully yours. Since they were restricted, there was no taxable event, and the value of these shares wasn’t included in your assessable income. But now that they’ve vested, their value is considered taxable income—even if you didn’t sell a single share.
Why does it feel unfair? It’s especially hard to swallow the tax bill if you haven’t sold any of your shares. That’s because you receive the shares, not cash, when participating in the ESS. Yet, when it’s time to pay the tax, you have to come up with cash out of pocket. You can’t just transfer a portion of your shares to the ATO to cover your tax liability.
The takeaway? When you are issued shares under an Employee Share Scheme, try to understand the tax outcome and consult an experienced accountant like Investax. Remember, it’s your income, your tax, and you’re the one who has to ensure you have the cash flow to pay it. Don’t be that person who repeatedly says, “But I don’t have the money!” Plan ahead for the tax bill, and if you do sell your shares, set aside the amount for your marginal tax to cater for the future liability. This is especially important if you haven’t done any prior tax planning with an experienced accountant.
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