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While more companies are opting to give their employees shares as a part of their total remuneration package, education around what this means come tax time is of the utmost importance.
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 the notion of bigger organisations providing shares to their employees and delved into what companies can be doing to educate their staff on the tax implications of these benefits.
Over the last few years, YOUtax has seen more and more employees become confused around employee stock options (ESOs) – and Baxter said that many have been educated simply because of a “bad experience”; such as receiving shares from their employer and then having to pay a hefty tax bill at the end of the financial year.
However, there are some companies providing webinars and presentations and educating their employees, including bringing in a tax adviser to advise employees on their unique circumstances.
“No two employees, from a tax perspective, are the same, even though the salary packages may be similar. So, the way that [these benefits] affect an individual are different. However, from my experience over the last three to four years, we've seen a lot of employees who are unaware or don't understand how the reporting [of these benefits] goes to the ATO and how the ATO reports it through their taxes. And everyone goes to their tax agent and their employee payment summary is pre filled and they go, okay, my employee payroll summary is in there,” Baxter explained.
“However, if you have restricted share units, it may take longer to pre-fill. So, an employee may not know till 12 months later that they had other income to report that they were not aware of. So, we've seen employees with over $100,000 tax bills being unaware of how they needed to report or at what timing of the year should they be. Seeing a tax advisor on an issue that is not your standard once a year appointment.”
While employers may be providing ESOs in the hopes of retaining staff for longer and incentivising them to do their best work to increase the company share price, confusion around tax implications of these shares may result in an employee feeling disgruntled.
“Personally, I think they are great salary packages. They’re modern, unique salary packages, where they're providing an investment for an ordinary employee that would not necessarily go out and buy shares. So, they're introducing them to other financial benefits and other investments through their employer, which is great, but [it’s important to] provide the advice and the understanding of what that means and when to sell or how to hold, there's a lot that goes on in the ownership of the shares itself,” Baxter added.
“What happens if the share price drops? What happens if it increases? So, we've seen in companies where it is hugely positively impactful when that share is rising and people have got great capital gains and benefits from receiving those shares. However, from the other perspective, in a dropping share market share price, then they have seen some negative impacts. So, at the point that you receive the shares and become ownership of the shares, whether that price rises or falls, the tax implication is at the date that that employee received that share.
“These are great benefits. However, understanding the financial literacy of the employees at the point that they are in their journey is very important. Giving a complicated investment structure as part of their salary without providing some educational advice or tax advice around that can provide a negative reaction. But fighting it early in the piece and providing a bit of understanding, provides comfort. Here's the good outcomes, here's the negative outcomes. This is how you can prepare yourself for them.”
Come tax time for employees with these benefit packages, there are a lot of different ways employees can be impacted, added Baxter.
“What is taxable? What is not taxable? When are you taxed? What happens if you end up with a $20,000 tax bill at the end of the year? What is the ATO going to do in those circumstances? They also need to look at things like, do they have student loans? You know, does this push their income into a higher tax bracket? When it does push their income into a higher tax bracket, it affects things like Medicare levy surcharges, private health insurance, government rebates. It affects access to Centrelink benefits,” she said.
“There is a vast myriad of [issues around] having shares and receiving shares that people think, oh, this is my base salary. It's an add on to your base salary, and as your income increases, there are more tax complications that happen in that. And to be prepared for that, we also educate people around the area of, are you selling your shares to pay the tax bill or are you selling your shares for profit and gains? Things to look out from those perspectives are really important.”
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Benefits include any additional incentives that encourage working a little bit more to obtain outcomes, foster a feeling of teamwork, or increase satisfaction at work. Small incentives may have a big impact on motivation. The advantages build on financial rewards to promote your business as a desirable employer.
