Introduction
Lately, we’ve observed a recurring sentiment among our clients, regardless of whether they are average income earners, high-income professionals, or even business owners: “I don’t have money.” This statement has become so widespread that it almost feels like a financial pandemic sweeping across different sectors of society. With record-high interest rates not seen in the past decade and rising inflation, many Australians find themselves unprepared for the surging cost of living.
The Reserve Bank of Australia’s cash rate target, which was 2.25% in 2014, remained low for several years, fostering a sense of financial stability and comfort. However, the landscape began to shift drastically in mid-2022, as the cash rate started climbing steadily, reaching 4.35% by October 2024. This rapid increase, coupled with rising mortgage repayments, energy costs, and everyday expenses, has placed immense pressure on household budgets. As a result, even those who once considered themselves financially secure are now struggling to keep up.
Overview – Sarah’s Employee Share Scheme Experience
Meet Sarah, a talented senior manager at a tech company who belongs to Australia’s top marginal tax bracket, thanks to her high annual salary and performance bonuses. With a demanding job and a newborn daughter, she has limited time to think about her tax obligations. A couple of years ago, her employer rewarded her with shares under an Employee Share Scheme (ESS). At the time, her payroll team assured her that the shares were restricted and could not be sold for two years, adding that there was no immediate tax liability.
Sarah recently gave birth to a newborn and went on maternity leave, anticipating a tax refund, believing she had overpaid tax on her income. A couple of years ago, she and her partner purchased a new property, financing 80% of it through a loan. With her maternity leave payments coming to an end, their cash flow began to tighten.
During her leave, with more time to reflect on her finances, Sarah decided to switch accountants. She engaged Investax to help manage her tax obligations, hoping that our strategies and guidance would alleviate her tax burden. However, she was shocked when she received her estimated tax bill—much of it attributed to her Employee Share Scheme (ESS).
Her immediate reaction was:
“I was given these shares a couple of years ago, and they weren’t taxed then, so why are they being taxed now?”
“I don’t have money. How am I going to pay the tax?”
What Went Wrong?
Sarah’s experience highlights a common issue employees face with Employee Share Schemes (ESS): misunderstanding when tax obligations arise and how to plan for them. When she first received the restricted shares, no tax was triggered because the shares were not yet vested and, therefore, not fully hers. The shares came with conditions—she had to remain employed for a certain period before they vested. Naturally, many employees, without reviewing the terms and conditions, assume that if no tax is due in the year they receive the shares, they will only face a tax liability when they sell the shares, believing it will solely involve Capital Gains Tax (CGT).
However, the tax obligation arose when the shares vested, becoming unrestricted and granting Sarah full ownership. At this point, the shares were treated as taxable income, even though she did not receive any cash. Employers do not withhold tax on ESS, meaning that when employees are awarded shares, they must cover the marginal tax liability out of pocket—even if they have not sold the shares. This unexpected liability caught Sarah off guard.
Sarah’s frustration grew when she realized that although she hadn’t sold the shares immediately, she still owed tax based on the market value of the shares at the time of vesting.
Solution: How Investax Assisted Sarah with Her ESS Tax Obligation
When Sarah approached Investax, we worked to provide a tax-effective solution that balanced her immediate needs and long-term goals. Understanding her concerns about cash flow and her desire to retain some shares for future growth, we advised her to sell 40% of her vested shares. This sale allowed her to cover the immediate tax payable without dipping into her cash savings.
In addition, we prepared her for the capital gains tax (CGT) implications she would face in the following financial year due to the share sale. By explaining these future obligations, Sarah was able to plan for the additional tax impact, avoiding any further surprises. We also structured her investment holdings to provide flexibility in future tax planning, ensuring she has options to manage her tax liabilities efficiently moving forward.
Through proactive guidance and strategic planning, Investax helped Sarah navigate her ESS tax obligations, easing her financial burden and allowing her to focus on her career and family with confidence in her tax position.
Lessons from Sarah’s Experience
Sarah’s story is a valuable lesson in cash flow management and tax planning—especially when you are entering a period of your life where you won’t have any income and receiving a gift from your employer. For employees participating in an ESS. Here’s what could have been done differently:
- Avoid Selective Hearing When Receiving Gifts from Your Employer –
- When awarded an Employee Share Scheme (ESS), don’t rely solely on what your payroll officer or manager tells you. Take the time to read the ESS document provided. If you haven’t received any documents, request them to review with your accountant and plan accordingly.
- If someone mentions that the shares won’t be taxed this year, consider asking about potential tax implications in future years.
- Understand the Taxing Point –
- Employees should be aware that tax obligations arise not when shares are issued, but when they vest and become unrestricted. The taxable event is based on ownership transfer, not the sale of the shares.
- Consult with a Tax Specialist Early –
- Engaging an accountant doesn’t mean they will automatically understand all aspects of your finances without regular communication. Any significant changes in your financial situation—such as receiving gifts from employers, purchasing a motor vehicle, acquiring investments, buying or selling a business, or transferring assets—should be discussed with your accountant in advance to avoid unexpected tax surprises. A proactive meeting with a tax specialist, like Investax, could have helped Sarah understand her future tax obligations and plan accordingly. While professional advice may seem like an upfront expense, it’s an investment that can prevent surprises and alleviate financial stress down the road.
