Employee Share Schemes Guide: Optimize Tax, Protect Assets

Background: David entered into a lucrative employment contract three years ago, with a salary exceeding $500,000 and an additional Employee Share Schemes (ESS) benefit valued at $300,000 from his employer. The shares from this scheme are set to vest every two years from the issue date. With a strategy focused on long-term gain, David plans to hold onto his shares, which he acquired at a discount. As he is in the highest tax bracket, he is actively seeking ways to minimise the tax liability on these shares without selling them prematurely. Moreover, David is working towards building a share portfolio worth one million dollars, with a strong emphasis on asset protection.

Employee Share Schemes

Challenges: David faces a cash flow issue due to the tax liabilities associated with his shares, which are affecting his liquidity; he is reluctant to sell any shares. His annual salary is not enough to cover the tax requirements on a gross income that includes an $800,000 ESS benefit. Moreover, his direct share ownership puts him at financial risk, lacking asset protection in case of legal actions. He is anticipating a gross dividend of approximately $100,000, including franking credits, for the fiscal year 2024 or 2025.

Personal Overview –

  1. David’s partner Catherine currently taking a career break and earns no income.
  2. Catherin is not contributing any money into her superannuation as she is currently unemployed.
  3. Both of their kids going to private school and one of them soon to be graduated.

Strategic Solutions:

  1. To mitigate the cash flow challenge, David could consider selling a portion of his shares—specifically, half—to manage the immediate tax liability associated with his ESS.
  2. Transferring the shares to a family trust could offer dual benefits: enhanced asset protection and more favourable tax planning.
  3. Even though the trust acquires the ESS shares from David’s employer, David would still need to report the ESS as part of his taxable income.
  4. The trust structure enables strategic dividend distribution. For instance, dividends can be allocated to David’s non-working wife, Catherine, utilising her lower tax rate, thereby realising significant tax savings.
  5. The Trustee can also issue a profit distribution from the trust to the child who is about to turn 18 to pay for her university fees. Since she does not earn any income, the trust distribution will be taxed at a lower marginal tax rate. This will significantly reduce the tax burden and improve the cash flow situation.

Outcome: By implementing this tax and structure planning strategy, David could potentially save about $17,000 in taxes on his dividend income by positioning of the shares within the trust. This saving is calculated roughly based on David’s top tax rate of 45% plus the Medicare Levy Surcharge of 2%, totalling 47%, minus the 30% franking credit on the $100,000 franked dividend received by the Trust. This approach allows the trust to distribute profits to Catherine efficiently. Through careful tax planning and a thorough understanding of tax regulations, David is poised to save substantially on his tax bill,
illustrating the power of strategic financial planning within the bounds of the law.

Conclusion: Do you see aspects of your own financial journey in David’s challenges with Employee Share Scheme (ESS) and solutions? Tax planning and asset protection are critical components of wealth management. Whether you’re aiming to build a robust investment portfolio like David, seeking to maximise your assets, or looking for ways to efficiently manage your tax obligations, Investax Group is here to guide you.

Our team of Tax and Investment Structure Professionals specialises in creating personalised strategies that align with your unique financial goals.

Reference –

ESS Interest Acquired by Associates – https://www.legacy.ato.gov.au/General/Employee-share-schemes/Employees/ESS-and-your-tax/ESS-interests-acquired-by-your-associates/

Australian Resident Tax Rate – https://www.legacy.ato.gov.au/Rates/Tax-rates—Australian-residents/?=Redirected_URL#Australianresidentstaxrates2020to2024