Employee Share Schemes (“ESS”)

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Employee Share Schemes (“ESS”)


Issuing employees with shares or options has long been a part of employer’s long term strategy to incentivise staff, by linking employee remuneration with share price performance.


Where the equity interest (i.e. shares or options) is issued to employees at less than the underlying market value of the interest, income tax is levied on the amount of the discount. Historically, employees had a choice as to when the taxing point would arise in certain circumstances, however, from 1 July 2009 this choice was removed by the introduction of more prescriptive legislation.


The new legislation also introduced a strict reporting system to both the Australian Taxation Office and to employees. With reporting deadlines imminent for the 2013 financial year, we have below summarised some of the key aspects of ESS legislation to help you determine whether your company may have a reporting obligation for the year.



An ESS is usually governed by a set of scheme rules. These are unique to each organisation and the taxing point varies depending on the conditions attaching to the schemes. Under the current legislation, ESS are categorised into four broad categories:

a) Taxed upfront scheme – an employee is taxed on the discount in the year that the EES is provided if the scheme does not qualify for concessional treatment;

b) Taxed-upfront scheme with $1,000 reduction – where certain conditions are met the amount of any discount is reduced by $1,000 for certain taxed-upfront schemes;

c) Tax deferred scheme salary sacrifice – subject to stringent criteria, the taxing point may be deferred for EES  interests acquired under a salary sacrifice arrangement; and

d) Tax deferred scheme real risk of forfeiture – where the “EES”  interest are subject to a real risk of forfeiture (cancellation) that taxing point may be deferred until such time that the risk is removed.


The ESS legislation applies only to shares (or options to acquire shares) provided in the employer or an associate of the employer. Accordingly, schemes which provide “shadow” or “phantom” shares to employees are not assessed under the ESS provisions. Phantom shares effectively allow remuneration of the employee in accordance with the share performance and dividend payments of the entity without the added complication of issuing actual equity instruments to them. As such, any income derived from a phantom scheme is taxed as ordinary employee remuneration.


Importantly, the ESS legislation applies to all Australian employees who participate in an ESS, regardless of whether the employer is an Australian entity. For example, an employer who offers Australian employees an ESS interest in an entity listed on a foreign stock exchange would be required to comply with Australia’s ESS reporting regime. Additional complexity also arises in respect of EES interests earned whilst


The ESS legislation is complex and has a wide scope. Should you require assistance with setting up an EES, your reporting obligations, or wish to discuss your ESS generally, please do not hesitate to contact your ESV Engagement Partner on 9283 1666.


Article by David Prichard