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As more companies offer shares as part of employee pay, the confusion around these benefits highlights the need for better education on their tax implications, according to YOUtax’s Emma Baxter.
Emma Baxter is the founder and director of tax and financial wellbeing provider YOUtax.
Speaking on a recent episode of The HR Leader Podcast, produced in partnership with YOUtax, she discussed some of the new incentives businesses are looking to offer employees; namely the provision of shares in that company (employee stock options, or ESOs) as well as the taxation implications and the resulting confusion around these benefits.
In the current market, YOUtax is focusing a lot of its efforts on global companies coming and settling in Australia and how the complications of their remuneration and benefits packages affect employees in today’s tax world.
In terms of what ESOs actually entail, Baxter said many companies are offering employees “restricted share units” or an “employee share bonus plan”, whereby employees are given shares instead of cash.
“It could be through a performance bonus, it could be through a signing bonus. Sometimes they have a vesting period of six months to three years. So, it's a way of engaging the employee to stay connected to the company and then they get the benefits. And providing share incentives to employees helps them to have more skin in the game with what they're doing in their jobs. But the tax treatment of these shares that are being provided in a company are very different to your salary and wages. When a company gives you shares, they are not tax free. ATO taxes every benefit that an employer receives from a company,” she explained.
“So, we've seen a lot of growing global companies come to Australia and have these packages involved in their salaries, and it's providing a bit of confusion and tax implications. And some think that receiving shares [is] free. The company gave me shares, whereas the ATO’s perspective is the company has given you an employee benefit and we are going to tax that benefit. So, with those misconceptions, it's very important for employees to understand those tax implications and how to prepare for [them] and who is responsible for providing that understanding to those employees.”
While companies may be implementing these strategies and then completely forgetting about them, Baxter said that definite issues arise each year during tax time.
“Where the confusion lies is that it is reported as income in your tax at the end of year. And if they haven't prepared for that outcome or are unaware of that outcome at the end, it either causes a bit of tax bill shock for the employee, but then they get confused. It all depends on the financial literacy and the understanding of the Australian tax system with the employees, whether they are Australian employees or whether you've got a global mobility strategy and have employees coming in from other countries.
“So, there is a lack of understanding in this area. And providing that information early at the signing of the package will eliminate a lot of the stress and burden and overwhelm that comes with it when they set and forget. But when they visit their tax agent, their tax agent says, hey, you've got a 10, 20, $30,000 tax bill.”
While there are Australian companies who offer this kind of remuneration, it’s becoming more and more common within global companies to provide shares as an employee benefit.
“It's in most of the modern day salary packages. And so, we see a lot more of it coming through as tax advisors. And there isn't a crash course on what you do if you receive shares in your package, in your salary package. And from the HR perspective, tax advice in this area is not there. From a HR perspective it is a responsibility to give advice to these employees about their package – [but] there is a risk of giving unqualified advice. So therefore, they shouldn't really be providing tax advice,” Baxter added.
“But also from an employee perspective, in Australia, the employer has always had the responsibility of withholding their tax and withholding for student loans and Medicare and things like that. So, it's kind of innate in the Australian employee that says my employer is going to withhold my tax. Should the company be stepping in and saying, hey, we know we cannot give this advice to you, however, let's bring in a specialist or let's bring in someone who is qualified in tax law who can communicate these packages in a way that allows them to not get into any trouble.”
As such, companies providing ESOs to employees should invest a little more in education around the tax implications of these packages – something Baxter said would be “really beneficial” moving forward.
“If they had tax consultant support or tax professional support, who could say, hey, we offer this service or even after they sign, to make sure that they're understanding all the benefits before they move across the country or, you know, spend all their salary without preparing for tax,” she added.
