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As companies increasingly offer shares as part of employee pay, the resulting confusion and tax implications highlight the need for better education on these benefits.
Emma Baxter, founder and director of YOUtax, discussed these issues on a recent episode of The HR Leader Podcast, emphasizing the challenges employees face in understanding the tax consequences of share-based compensation.
Baxter explained that many employees are unaware of the tax treatment of shares provided by their employers. “When a company gives you shares, they are not tax-free. The ATO taxes most benefits that an employer provides,” she said. This misunderstanding can lead to significant tax bill shocks for employees who are unprepared for the financial impact. “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."
The complexity of Australian tax laws adds to the confusion, especially for employees hired from other countries. Baxter noted that global companies often provide share-based compensation, but the tax implications can vary widely depending on the employee’s residency status and the specifics of the share plan. “We’ve seen employees with over $100,000 tax bills being unaware of how they needed to report their share income,” she said.
For example, two employees moved to Australia within the same company—one from Ireland on a Temporary Residency Visa and one from Singapore on a Permanent Residency Visa. Both had company shares from previous employment. The employee from Ireland sold his shares and faced no Australian tax due to his temporary residency status. However, the employee from Singapore sold her shares and ended up with a $35,000 tax bill due to her PR status. A short consultation with a qualified tax advisor could have saved her this significant amount by selling her shares before entering the country.
In terms of what RSUs (restricted stock units) actually entail, Baxter explained that many companies are offering employees “restricted share units” or an “employee share bonus plan,” whereby employees are given shares instead of cash. Or, there may be a salary sacrifice arrangement, where employees can acquire shares at a discount. “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,” she said.
To address this issue, Baxter advocates for better education and support from employers. “Providing information early, at the signing of the package, can eliminate a lot of stress and confusion,” she suggested. Companies should invest in educational resources, such as webinars and presentations, and provide access to qualified tax advisors who can offer personalized advice. Baxter added, “If they had tax consultant support or tax professional support, who could say, ‘Hey, we offer this service,’ even after they sign, to make sure that they're understanding all the benefits before they move across the country or spend all their salary without preparing for tax.”
Baxter also highlighted the importance of understanding the financial literacy of employees. “Giving a complicated investment structure as part of their salary without providing educational or tax advice can lead to negative reactions,” she warned. “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.”
In summary, the growing trend of offering shares as part of employee pay necessitates a greater focus on education and support. Employers must recognize the potential for confusion and tax implications and take proactive steps to ensure their employees are well-informed and prepared. Providing timely and clear advice can help prevent unexpected tax liabilities and make share-based compensation a more valuable and manageable benefit for employees.
