Employee share scheme - guide for employers

Introduction

The tax law contains specific rules about how tax applies to employee share scheme (ESS) interests. These rules apply to shares, stapled securities and rights to acquire them (including options), that have been provided to your employees at a discount under an ESS.

Laws applying from 1 July 2009, changed the tax treatment of an ESS. This guide explains how these law changes apply to ESS interests provided to your employees at a discount.

If ESS interests have not been granted at a discount, the benefits given to your employees may be taxed under other provisions of the tax law, such as capital gains tax.

For more information about capital gains tax, visit Capital gains tax - home.

Terms we use

Term	Definition
$1,000 upfront tax concession	A concession available to your employee participating in a taxed-upfront scheme, if the scheme meets certain conditions and their taxable income after adjustments is $180,000 or less.
30-day rule	If your employee disposes of their ESS interest (or the share acquired on exercise of the right) within 30 days after the deferred taxing point, the deferred taxing point becomes the date of that disposal.
Associates	Associates of an individual include people and entities, such as relatives, partners or closely connected companies or trustees of a trust (other than the trustee of an employee share trust). This definition is further expanded in section 318 of the Income Tax Assessment Act 1936.
Cessation time	Cessation time is a term that belongs to the previous law. It does not apply to ESS interests acquired after 30 June 2009. The cessation time for shares is generally the time they are acquired. However there could be restrictions or conditions related to that share that make the cessation time a later date. The cessation time for rights is generally when they are exercised or disposed of, or the time when the employment that the right was received in ceases. However, there may be restrictions or conditions related to the share resulting from exercise of the right that will make the cessation time a later date. Cessation time is defined in sections 139CA, 139CB and 139DSH of the previous law.
Cost base	The cost base of an asset is generally what it costs you. It is made up of five elements: the money you paid or property you gave for the asset the incidental costs of acquiring or selling it (for example, brokerage and stamp duty) costs of owning it (generally this will not apply to shares or units because you will usually have claimed or be entitled to claim these costs as tax deductions) costs associated with increasing or preserving its value, or with installing or moving it the cost to you to preserve or defend your title or rights to it - for example, if you paid a call on shares. The cost base for a share or unit may need to be reduced by the amount of any non-assessable payment you receive from the company or fund. Cost base is explained in Subdivision 110-A of the Income Tax Assessment Act 1997.
Deferred taxing point	If you provide your employees with ESS interests under a tax-deferred scheme and they meet certain conditions, they will not be assessed on the discount received on the ESS interests until the year that the deferred taxing point occurs in. See deferred taxing point: for shares for rights.
Discount	If your employee acquires ESS interests under a taxed-upfront scheme, the discount will be the market value of the ESS interests at acquisition, reduced by the amount the employee paid to acquire the ESS interests. If your employee acquires ESS interests under a tax-deferred scheme, the discount will be the market value of the ESS interests at the deferred taxing point, reduced by the cost base of the ESS interests.
Employee share scheme (ESS)	A scheme that provides ESS interests (shares, stapled securities and rights to shares or stapled securities) in a company are provided to employees (including past or prospective employees and their associates) in relation to the employee's employment.
ESS interests	A beneficial interest in a share in a company, or a beneficial interest in a right to acquire a beneficial interest in a share in a company. ESS interests are shares, stapled securities or rights (including options) to acquire shares or stapled securities.
Indeterminate rights	A right that is acquired by your employee if the entitlement to a share or a specific number of shares may be uncertain.
Law changes, including transitional arrangements	Division 83A of the Income Tax Assessment Act 1997 applies to ESS interests acquired under employee share schemes on or after 1 July 2009 and to some shares or rights acquired before that date. Division 83A of the Income Tax (Transitional Provisions) Act 1997 contains the transitional arrangements that will apply to some shares or rights acquired before 1 July 2009.
Option	An option is a form of right. If you grant an option to your employee, you make an agreement with that employee allowing them to buy a share during a certain time period, for a particular price (the exercise price). The employee then has the right but not the obligation to exercise the option.
Previous law	Division 13A of Part III of the Income Tax Assessment Act 1936 provided for the tax treatment of shares or rights acquired under employee share schemes before it was repealed on 14 December 2009.
Qualifying share or right	Qualifying is a term that belongs to the previous law. It does not apply to ESS interests acquired after 30 June 2009. A share in a company will be a qualifying share if it meets the following requirements: the share is acquired by an employee from an employee share scheme the company is the employee's employer or the employer's holding company the share available from the employee share scheme is an ordinary shares after acquiring the share, the employee does not hold a legal or beneficial interest in more than 5% of the shares in the company after acquiring the share, the employee is not in a position to cast, or control the casting of, more than 5% of the votes at the company's general meeting when the employee acquired the share, at least 75% of the permanent employees of the employer were, or at some earlier time had been, entitled to acquire shares from an employee share scheme of the employer or its holding company. A qualifying right must meet all of the above requirements, except for the last.
Reportable fringe benefits	Benefits you give your employee because of their employment (other than salary and wages) are included as fringe benefits, even if you actually provide them to an associate of the employee. The grossed-up taxable value of those benefits that you record on your employee's payment summary for the income year that corresponds to your FBT year is their reportable fringe benefits amount. The reportable fringe benefits total is the sum of the reportable fringe benefits amounts from different employers. For more information about fringe benefits, refer to the Fringe Benefits Tax Assessment Act 1986.
Reportable employer superannuation contributions	Reportable employer super contributions are those contributions you make for your employee if all of the following apply: your employee influenced the rate or amount of super you contribute for them the contributions are additional to the compulsory contributions you must make under any of the following super guarantee law an industrial agreement the trust deed or governing rules of a super fund a federal, state or territory law.
Reportable superannuation contributions	Reportable super contributions consist of: the employee's deductible personal super contributions (if any) the employee's reportable employer superannuation contributions.
Salary sacrifice arrangements	An arrangement where an ESS interest is provided either: because the employee agreed to acquire the ESS interest in return for a reduction in salary or wages that would not have happened apart from the agreement as part of the employee's remuneration package, in circumstances when it is reasonable to conclude that the employee's salary or wages would be greater if the ESS interest was not part of that package. ESS interests acquired under salary sacrifice arrangements are treated as acquired at a discount.
Taxable income after adjustments	An employee's taxable income after adjustments for the year is the sum of: taxable income reportable fringe benefits total reportable superannuation contributions total net investment loss (below).
Total net investment loss	An employee's total net investment loss is the sum of: the amount that the employee's deductions from financial investments are greater than their income from those investments, for the income year the amount that the employee's rental property deductions are greater than their rental property income, for the income year.

Tax arrangements for employee share schemes

An employee share scheme (ESS) is a scheme that provides ESS interests in a company to employees (including past or prospective employees and their associates) in relation to their employment.

The ESS rules cover not only employees of a company but also individuals in relationships similar to employment, such as directors and independent contractors.

Generally, employment benefits you provide to an employee would be taxed under the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986). However, the law changes specifically exclude ESS interests acquired under an ESS from being taxed as a fringe benefit under the FBTAA 1986.

For ESS interests provided to your employees before 1 July 2009, see Transitional arrangements for an explanation of how law changes affect existing ESSs.

Example 1: ESS interests

Daniel is employed by Blackbooks Ltd. As part of his total employment remuneration package, the company provides Daniel with a beneficial interest in shares in Blackbooks Ltd. The shares are provided at a discount.

The shares that Daniel receives are ESS interests provided under an ESS. As a result, the discount given for the shares Daniel acquired will be taxed under the ESS rules and not under the fringe benefits tax provisions.

Types of ESS

From 1 July 2009, there are different types of ESS that you can offer your employees:

Taxed-upfront scheme: the default position - If the scheme does not meet the conditions for concessional tax treatment, your employees will be taxed on the discount on the ESS interests in the year the ESS interests were provided to them.
Taxed-upfront scheme: eligible for $1,000 reduction - Subject to certain conditions being met by both the ESS and your employees, concessional tax treatment is available for your employees who have received ESS interests under a taxed-upfront scheme if they also meet an income test. The concession allows your employees to reduce their taxable discount income by up to $1,000.
Tax-deferred scheme: salary sacrifice - Subject to certain conditions being met by both the ESS and your employees who have acquired ESS interests under salary-sacrifice arrangements, these ESS interests will be taxed in the income year that the deferred taxing point occurs in.
Tax-deferred scheme: real risk of forfeiture - Subject to certain conditions being met by both the ESS and your employees who have acquired ESS interests when there is a real risk of forfeiture under the conditions of the scheme, these ESS interests will be taxed in the income year that the deferred taxing point occurs in.

The type of scheme you offer will generally determine the tax treatment of the ESS interests provided to your employees. You can provide ESS interests to your employees under more than one type of scheme.

General conditions for concessional tax treatment

To qualify for concessional tax treatment as detailed above, your ESS and your employee must meet all the following conditions:

the ESS interests acquired by your employees must be in you (their employer) or your holding company
when your employee acquires the interest, all ESS interests available for acquisition under the scheme must relate to ordinary shares
the ESS interests provided must not result in either of the following immediately after acquisition

your employee owning more than 5% of the shareholding
your employee controlling more than 5% of the maximum voting rights.

In addition to the above general conditions, your employees must meet other specific conditions to qualify for the $1,000 reduction or deferred tax. These conditions are detailed below.

Your employees will not be eligible for the upfront or deferred tax concession if:

the predominant business of your company is that you acquire ESS interests in the acquisition, sale or holding of shares, securities or other investments (directly or indirectly)
they are employed by your company that conducts that business
they are also employed by a subsidiary of your company or a holding company of your company that conducts that business, or a subsidiary of the holding company that conducts that business.

Taxed-upfront schemes

Taxed-upfront scheme - eligible for $1,000 reduction

In addition to the general conditions, the ESS and your employees must meet the following specific conditions to be eligible for the $1,000 reduction:

your employee must not have a real risk of forfeiting the ESS interest under the conditions of the scheme
the scheme must be operated so that all your employees must hold the ESS interest (or any share acquired on exercise of an ESS interest that is a right) for three years or until your employee ceases employment
the scheme must be offered on a non-discriminatory basis to at least 75% of your Australian-resident permanent employees with three years service.

Your employee must also meet the income test to access the $1,000 reduction. Under the income test, your employee's taxable income (after adjustments) for the income year must be $180,000 or less.

As an employer, you will not be able to determine the taxable income (after adjustments) of your employees and; therefore, whether they will be eligible for the $1,000 reduction. However, you need to advise them whether the scheme that they are participating in meets the other eligibility criteria.

Example 2: Taxed-upfront scheme - eligible for reduction

Matt works for Core Bank Ltd and acquired 600 shares in Core Bank Ltd under an ESS on 4 August 2010.

The total market value of the shares is $3,600. Matt paid $1,200 to purchase the shares; therefore, he acquires the shares for a discount of $2,400 ($3,600 less $1,200).

On 7 July 2011 Matt's employer, Core Bank Ltd, gives Matt an ESS statement as follows:

Core Bank Ltd ESS statement with $2,400 at label D

As Matt has provided his TFN to Core Bank Ltd, there is no amount shown in the 'TFN amounts withheld from discounts' field on Matt's ESS statement.

Matt has to complete item 12 Employee share schemes on his 2011 tax return. He is eligible for the upfront concession of $1,000 as the scheme, Matt's personal circumstances and his taxable income after adjustments, all meet the conditions. He writes:

$2,400 at label D Discount from taxed upfront schemes - eligible for reduction
$1,400 ($2,400 discount less $1,000 concession) at label B Total assessable discount amount, as Matt has no other ESS interests.

Core Bank Ltd lodges an ESS annual report showing all reportable ESS data for their employees with us by 14 August 2011.

Core Bank Ltd includes the following information about Matt in the report:

the number of shares acquired, 600, at Number of ESS interests from taxed upfront schemes eligible for reduction
$2,400 at Discount from taxed upfront schemes - eligible for reduction.

As Core Bank Ltd will not know Matt's taxable income after adjustments, they report the discount as $2,400, ignoring the $1,000 concession.

Timeline of events

Date	Event
4 August 2010	Matt acquires 600 shares with a total market value of $3,600.
	Matt pays Core Bank Ltd $1,200.
	Matt acquires the shares for a $2,400 discount.
7 July 2011	Core Bank Ltd gives Matt his ESS statement.
14 August 2011	Core Bank Ltd lodges a completed ESS annual report with us.

Example 3: Taxed upfront scheme - not eligible for reduction (shares)

Liam works for Starstruck Ltd and acquires 800 shares in Starstruck Ltd under an ESS on 23 September 2010.

The total market value of the shares on that day is $4,800. Liam paid $3,900 to purchase the shares; therefore, he acquires the shares for a discount of $900 ($4,800 less $3,900).

On 9 July 2011, Starstruck Ltd gives Liam an ESS statement as follows:

Starstruck Ltd ESS statement with $900 at label E

Liam has to complete item 12 Employee share schemes on his 2011 tax return. He writes:

$900 at label E Discount from taxed upfront schemes - not eligible for reduction
$900 at label B Total assessable discount amount, as he has no other ESS interests.

Starstruck Ltd will need to include the following information about Liam in the ESS annual report:

the number of shares acquired, 800, at Number of ESS interests from taxed upfront schemes not eligible for reduction
$900 at Discount from taxed upfront schemes - not eligible for reduction.

Timeline of events

Date	Event
23 September 2010	Liam acquires 800 shares with a total market value of $4,800.
	Liam pays Starstruck Ltd $3,900.
	Liam acquires the shares for a discount of $900.
9 July 2011	Starstruck Ltd gives Liam his ESS statement.
11 August 2011	Starstruck Ltd lodges a completed ESS annual report with us.

Example 4: Taxed upfront scheme - not eligible for reduction (options)

Grace works for Big Ted Ltd and acquires 1,400 options to acquire shares in Big Ted Ltd under an ESS on 10 November 2011. The options have an exercise price of $2.50 each and an expiry date of 10 November 2015.

Grace can exercise some or all of her options, at any time up to the expiry date. For each option she exercises, she will need to pay Big Ted Ltd the exercise price of $2.50.

The market value of each option on 10 November 2011 is $3.40. Therefore, Grace acquires the options for a discount of $1,260 [1,400 options x ($3.40 market value less $2.50 exercise price)].

On 10 July 2012, Big Ted Ltd gives Grace an ESS statement as follows:

Big Ted Ltd ESS statement with $1,260 at label E

Grace has to complete item 12 Employee share schemes on her 2012 tax return. She writes:

$1,260 at label E Discount from taxed upfront schemes - not eligible for reduction
$1,260 at label B Total assessable discount amount, as Grace has no other ESS interests.

Big Ted Ltd will need to include the following information about Grace in their ESS annual report:

the number of options acquired, 1,400, at Number of ESS interests from taxed upfront schemes not eligible for reduction
$1,260 at Discount from taxed upfront schemes - not eligible for reduction.

Timeline of events

Date	Event
10 November 2011	Grace acquires 1,400 options, with an exercise price of $2.50 each and an expiry date of 10 November 2014.
	The market value of each option is $3.40.
	Grace acquires the options for a discount of $1,260.
10 July 2012	Big Ted Ltd gives Grace her ESS statement.
30 July 2012	Grace includes the discount of $1,260 on her 2011 tax return and lodges it with us.
11 August 2012	Big Ted Ltd lodges a completed ESS annual report with us.

Tax-deferred schemes

If an ESS and your employees who have acquired the ESS interests under the scheme meet certain conditions, the ESS interests will be taxed in the income year that the deferred taxing point occurs in.

Tax-deferred scheme - salary sacrifice

In addition to the general conditions, the following conditions must be met for the scheme to be considered a tax-deferred scheme - salary sacrifice:

the ESS interests are shares (or stapled securities) that are acquired under a salary-sacrifice arrangement from you (their employer) or your holding company
when you provide the shares (or stapled securities), the discount must equal the market value of the shares (or stapled securities)
the rules governing the scheme must expressly state that the deferred tax arrangement applies to the scheme
at least 75% of your Australian-resident permanent employees with three years service are, or at some earlier time had been, entitled to acquire ESS interests in you (their employer) or your holding company under an ESS
any rights acquired under the scheme must be subject to a real risk of forfeiture.

For the tax to be deferred, your employee must not receive more than $5,000 worth of shares (or stapled securities) during the year, under salary-sacrifice arrangements from you (their employer) or your holding company.

Example 5: Tax-deferred scheme - salary sacrifice, $5,000 per employment relationship

During 2010-11, Allan works for two unrelated employers: Nursing Company Ltd and Building Company Ltd. Both companies offer Allan shares in a tax-deferred scheme - salary sacrifice.

Under the scheme offered by Nursing Company Ltd, Allan acquires 100 shares with a total market value of $4,000. Under the scheme offered by Building Company Ltd, Allan acquires 200 shares with a total market value of $5,000. None of the shares acquired under these schemes is subject to a real risk of forfeiture.

Allan is eligible to defer tax for his shares in both Nursing Company Ltd and Building Company Ltd because the market value of the shares acquired under salary sacrifice did not exceed $5,000 under either scheme and the employers, being unrelated, are not part of the same corporate group.

Tax-deferred scheme - real risk of forfeiture

In addition to the general conditions, the following conditions must be met for the scheme to be considered a tax-deferred scheme - real risk of forfeiture:

your employee must have a real risk of forfeiting the ESS interest under the conditions of the scheme
if the ESS interests are shares, at least 75% of your Australian-resident permanent employees with at least three years service are, or at some earlier time had been, entitled to acquire ESS interests in you or your holding company under an ESS.

What is a real risk of forfeiture?

Whether or not a real risk of forfeiture is present will depend on the facts and circumstances of each scheme and the individual circumstances of your employee.

An ESS interest acquired by your employee is at real risk of forfeiture if a reasonable person would consider that there is a real risk that your employee may forfeit or lose the ESS interest, other than by intentionally taking no action to realise the benefit.

The real risk of forfeiture test does not require you to provide schemes that ESS benefits are at a significant or substantial risk of being lost in.

The meaning of 'real' is something more than a mere possibility. An ESS interest will not be at real risk of forfeiture if a reasonable person would disregard the risk as highly unlikely to occur or as nothing more than a rare eventuality or possibility.

Real risks of forfeiture in a scheme may include conditions where retention of the ESS interests is subject to:

performance hurdles
a minimum term of employment.

There is no real risk of forfeiture if a scheme simply includes a condition that:

restricts your employee from disposing of an ESS interest for a specified time
allows your employee to request that the ESS interest be forfeited
provides for your employee to forfeit an ESS interest if they are dismissed for fraud or gross misconduct.

Example 6: Forfeiture on cessation of employment, real risk

Steve works for Ceiling Ltd and is granted rights to acquire shares in Ceiling Ltd under an ESS.

Under the conditions of the scheme, Steve's rights will lapse if he ceases employment with Ceiling Ltd within the next 12 months.

Steve's rights to acquire shares in Ceiling Ltd are accepted as being at a real risk of forfeiture.

Example 7: Performance hurdle sales target, no real risk

Tania works for South Ltd and is granted rights to acquire shares in South Ltd under an ESS.

Under the conditions of the scheme, Tania's rights will lapse if South Ltd's current year sales do not exceed last year's sales.

The ESS does not have a minimum employment requirement.

South Ltd has increased its sales by more than 10% in each of the preceding five years and has recently taken over a major competitor.

In this case, we consider that a reasonable person might consider that the rights acquired by Tania were not at a real risk of forfeiture.

For more information and examples, refer to Real risk of forfeiture.

Deferred taxing point

If you provide your employees with ESS interests under a deferral scheme and they meet certain conditions, they will be assessed for tax purposes in the year that the deferred taxing point occurs in. The amount assessed will be the market value of the ESS interests at the deferred taxing point, reduced by the cost base of the interests.

For shares

The deferred taxing point for a share or stapled security is the earliest of the following times:

seven years after your employee acquired the share
when your employee ceases the employment they acquired the share in
when there is no real risk of forfeiture and the scheme no longer genuinely restricts the disposal of the share.

For rights

The deferred taxing point for a right is the earliest of the following times:

seven years after your employee acquired the right
when your employee ceases the employment they acquired the right in
when there is no real risk of forfeiting the right and the scheme no longer genuinely restricts disposal of the right
when there is no real risk of forfeiting the right or underlying share, and the scheme no longer genuinely restricts exercise of the right or disposal of the resulting share.

30-day rule

If your employee disposes of their ESS interest (or the share acquired on exercise of the right) within 30 days after the deferred taxing point, the deferred taxing point becomes the date of that disposal (this is called the 30-day rule).

For example, a deferred taxing point arises on 10 March 2013 and the employee disposes of the ESS interest on 29 March 2013. Due to the sale being within 30 days, the deferred taxing point is now 29 March 2013.

You must take account of the 30-day rule when you are aware of a disposal.

In some situations, this means that the 30-day rule will move the deferred taxing point from one income year into the next. In that case, when fulfilling reporting obligations:

if you become aware of the disposal before issuing the to your employee for the earlier year, you must update the ESS statement for the earlier year so that it does not show a discount for those ESS interests in that year (but include the discount on the ESS statement for the later year)
if you become aware of the disposal after issuing the ESS statement to your employee for the earlier year, you must give an amended ESS statement to your employee to remove the discount for those ESS interests in that earlier year, and you will need to show the discount in the ESS statement for the later year
if you have already sent the ESS statement to us, you will need to amend the ESS annual report for the earlier year, to ensure that we and your employee have the same information.

For more information about the 30-day rule, refer to Employer reporting requirements for employee share schemes.

Indeterminate rights

At the time of acquisition of a right by your employee, the entitlement to a share or a specific number of shares could be uncertain. For example, you could provide your employee with a right to acquire at a future time:

either shares or cash (whichever you decide)
shares with a specified total value, rather than a specified number of shares
an indeterminate number of shares, that is, the exact number of shares is not specified at the time the employee acquires the right.

The law changes (including the transitional law) will apply as if that right had always been rights to acquire those shares from the time the original right was acquired if and when it becomes clear that the right will result in the receipt of:

shares, if previously it could have been shares or cash
a definite number of shares, if previously it was shares to a total value or an unspecified number of shares.

Example 8: Taxed upfront scheme - not eligible for reduction with amendments to indeterminate rights

This example follows on from example 2, when Matt received shares in an upfront scheme eligible for reduction with a discount of $2,400.

On 14 April 2011, Matt is granted a right to an employment benefit by his employer Core Bank Ltd. Matt pays no consideration for the right.

The right is not subject to a real risk of forfeiture.

The right will be met on 14 April 2014. At that time, Core Bank Ltd will determine whether to meet the right with cash or Core Bank Ltd shares.

On 14 April 2014, Core Bank Ltd decides to give Matt 1,000 shares. The right that Matt acquired on 14 April 2011 is now treated as if it had always been rights to acquire 1,000 shares. Those rights were acquired under a taxed-upfront scheme not eligible for reduction.

The market value of the rights on 14 April 2011 was $4,000. As Matt paid no consideration for the rights, the discount on the rights is $4,000.

Within 30 days of Core Bank Ltd determining that Matt would receive 1,000 shares, they must give Matt an amended ESS statement for 2010-11. On 10 May 2014, Core Bank Ltd gives Matt an amended ESS statement as follows:

Core Bank Ltd ESS statement with $2,400 at label D and $4,000 at label E

Core Bank Ltd also lodges an amended ESS annual report for 2010-11 with us on 10 May 2014, including the following information about Matt's amended details:

1,000 at Number of ESS interests from taxed upfront schemes - not eligible for reduction
$4,000 at Discount from taxed upfront schemes - not eligible for reduction
600 at Number of ESS interests from taxed upfront schemes - eligible for reduction
$2,400 at Discount from taxed upfront schemes - eligible for reduction.

Ordinarily, Matt's assessment could only be amended within a two-year period. Because Matt receives a discount on a right that became rights to acquire shares, he must amend his 2011 tax return to include the discount income, despite the period being more than two years.

Matt requests an amendment to his 2011 tax return on 6 June 2014. At item 12 on his amendment he writes:

$4,000 at label E Discount from taxed upfront schemes - not eligible for reduction
$5,400 at label B Total assessable discount amount ($2,400 plus $4,000 less $1,000 concession).

Timeline of events

14 April 2011	Core Bank Ltd provides Matt with a right to an employment benefit for nil consideration. The right entitles Matt to acquire, at Core Bank Ltd's discretion, either shares or cash at some time in the future.
14 April 2014	Core Bank Ltd decides to give Matt 1,000 shares to meet his rights. The right that Matt acquired on 14 April 2011 is now treated as if it had always been rights to acquire 1,000 shares. The rights to 1,000 shares had a market value of $4,000 at acquisition on 14 April 2011.
10 May 2014	Within 30 days of deciding to give Matt shares to meet his rights, Core Bank Ltd gives an amended ESS statement to Matt and gives an amended ESS annual report to us, for 2010-11.
6 June 2014	Matt requests an amendment for his 2011 tax return.

For information about reporting requirements for indeterminate rights, refer to Employer reporting requirements for employee share schemes.

Employer obligations

From 1 July 2009, if you provide ESS interests to your employees or to their associates, reporting and withholding obligations apply.

You must also report certain information about ESS interests that are shares or rights (including stapled securities) that your employees acquired before 1 July 2009 if a cessation time for those interests did not occur before 1 July 2009.

TFN withholding (ESS)

Withholding tax will apply if:

you provide a discounted ESS interest to your employee
that employee has not given you their tax file number (TFN) or Australian business number (ABN) by the end of the relevant income year.

If your employee has given you a TFN declaration for their employment, no withholding tax is payable.

Withholding tax is calculated on the discount that your employee should include in their assessable income under the ESS rules.

If you have engaged the services of a third party to administer your ESS, you may give them your employee's TFN. In these circumstances, no withholding tax is payable.

For information about ESS interests acquired before 1 July 2009 and TFN withholding, see Transitional arrangements.

Rate of withholding tax

The rate of withholding tax is 46.5% - the highest individual marginal tax rate plus the Medicare levy.

Remitting withholding tax

You must remit withholding tax to us within 21 days after the end of the income year that your employee is assessable on the discount in. For taxed-upfront schemes, this will be the year your employee acquired the ESS interests. For tax-deferred schemes, this will be the year when the deferred taxing point arises.

If you must remit withholding tax to us, you may recover the withholding tax from your employee. You can do this by offsetting the amount of withholding tax paid against any amount you owe to your employee, such as salary and wage income.

Reporting requirements

Under the ESS law changes, you must provide us and your employee with information about your employee's ESS interests.

For more information about reporting, see:

Share trusts if ESS interests are acquired through a share trust
Transitional arrangements for shares and rights acquired before 1 July 2009.

Reporting to employees

You must give your employee an ESS statement if:

they (or their associates) have acquired ESS interests under a taxed-upfront ESS at a discount during the income year
a deferred taxing point for ESS interests acquired under a tax-deferred ESS (or a cessation time for shares and rights acquired before 1 July 2009) has arisen or could have arisen in the income year.

You must provide the ESS statement to your employee by 14 July, after the end of the income year. The ESS statement will help your employee complete their tax return.

The information you must provide on the ESS statement includes, but is not limited to, the following:

the discount for ESS interests acquired under each type of taxed-upfront scheme
the discount for ESS interests acquired under a tax-deferred scheme that a taxing point arose during the income year
the discount for shares and rights acquired before 1 July 2009 that a cessation time occurred during the income year
the total TFN amount withheld from discounts during the income year.

ESS statement

For a copy of the ESS statement, refer to Employee share scheme statement.

When determining and reporting the discount at the deferred taxing point to your employee, you must take account of the 30-day rule if you know that the ESS interests were disposed of by your employee.

Reporting amendments to your employee

If you become aware of any material change or material omission in any information you have given to your employee, you must use the Employee share scheme statement - amended employee summary to provide them with the corrected information within 30 days of becoming aware of the change or omission.

If you provide your employee with a right to an employment benefit that could later become an ESS interest, see Indeterminate rights.

Reporting to us

You must provide an ESS annual report to us by 14 August after the end of the income year on an approved form.

You can develop your own in-house software to lodge annual reports electronically.

To develop your own software, our specifications are available from the Software developers homepage.

For more information for providers and suppliers of ESS information, refer to How to lodge your employee share scheme annual report electronically.

To help small-to-medium sized employers lodge their ESS annual report, we have two products available:

ESS Data Capture Tool
ESS Bulk Load Excel Spreadsheet.

For more information about these products, refer to Employee share scheme (ESS) ATO developed reporting products or contact us by:

phone on 1800 072 681
email to ATO-ESS@ato.gov.au

To download a copy of the paper form, refer to Employee share scheme (ESS) annual report.

The ESS annual report you provide to us must include information for each of your employees participating in an ESS and for each ESS that your employees are participating in. In general, this should include:

a plan identifier that uniquely references each plan offered by you
a plan date for the ESS taxing point; this will be one of the following

the acquisition date, for taxed-upfront schemes
the deferred taxing point for tax-deferred schemes

TFN amounts withheld from discounts on ESS interests that a taxing point arose during the income year.

For taxed-upfront schemes, you must provide information about the:

number of ESS interests acquired under taxed-upfront schemes eligible for reduction during the income year
discount for ESS interests acquired under taxed-upfront schemes eligible for reduction
number of ESS interests acquired during the income year under taxed-upfront schemes not eligible for reduction
discount for ESS interests acquired under taxed-upfront schemes not eligible for reduction.

For tax-deferred schemes, you must provide information about the:

number of ESS interests that a deferred taxing point arose during the income year
discount on the ESS interests that a deferred taxing point arose during the income year
discount for ESS interests acquired before 1 July 2009 that a cessation time occurred during the income year, whether or not your employee has made an election.

If you are using electronic lodgment, the following information is optional - the:

number of ESS interests acquired under a tax-deferred scheme during the income year
number of ESS interests acquired from a foreign source during the income year
discount for ESS interests that have a foreign source.

When determining and reporting to us the discount at the deferred taxing point, if you know that the ESS interests were disposed of, you must take account of the 30-day rule.

Reporting amendments to us

If you become aware of any material change or material omission in any information given to us, you must use an approved ESS annual report form to provide us with the corrected information within 30 days of becoming aware of the change or omission.

Report the following errors in employee details to us:

TFN or ABN
account holding number
account holding type
employee identifier
name
date of birth
amounts
number of ESS interests.

You do not need to report to us changes that your employee must report to us, such as their change of name or address.

If you provide your employee with a right to an employment benefit that could later become an ESS interest, see Indeterminate rights.

Provide in the amended report all the:

details that have not changed (amounts, ESS provider and employee details) exactly the same as they were in the original report
corrected details (amounts, ESS provider and employee details) for those that were reported incorrectly in the original report.

When you send us reports with amended records, you must report the following information (if these details have not changed) exactly as it appears on the original record:

income year
provider ABN
provider employee ID
employee TFN
plan reference
plan date / taxing point.

If you do not provide the same details in the amended report, we cannot correct previously lodged records. This may result in duplicate or incorrect ESS records for your employee and lead to unnecessary compliance activities and discrepancies in pre-filled data.

If you want to correct any of the information listed above, we will need to remove existing records before including the correct details. For information about how to correct these records, refer to the instruction guide for your preferred method of reporting.

For more information, refer to Employer reporting requirements for employee share schemes.

For more information about reporting requirements for 2011-12, refer to Supplementary reporting requirements for employee share schemes - reduced ESS statements 2011-12.

Calculating the discount

Taxed-upfront

For ESS interests acquired under taxed-upfront schemes, you will need to calculate the discount (market value of the ESS interests when they are acquired less any consideration paid or payable, by your employees, for the interest) and then include this amount on the statements you provide to us and your employees.

Tax-deferred employee

For ESS interests acquired under tax-deferred schemes you will need to determine the amount to be included in your employee's assessable income in the income year that the deferred taxing point occurs in. The amount to be included is the market value of the ESS interest at the deferred taxing point, reduced by the cost base of the ESS interest (that may include other expenses, such as brokerage fees).

When calculating the discount amount at the deferred taxing point, you may not be aware of all the elements of the cost base. Therefore, the discount amount you provide may be a reasonable estimate.

Determining the market value

To calculate the discount on ESS interests, you need to determine their market value first.

For the purposes of the law changes, the term 'market value' takes on its ordinary meaning.

For more information about working out the market value, visit our website at Employee share schemes - home - then select 'In detail' - 'Market value'.

Market value of unlisted rights

The Income Tax Assessment Regulations 1997 provide a market valuation methodology for determining the market value of unlisted rights that must be exercised within 10 years after acquisition. Your employee can choose to use this methodology or determine the market value according to its ordinary meaning when valuing unlisted rights.

Use our Employee share schemes calculator to estimate the market value of unlisted rights and the discount your employee receives when they join an ESS.

Transitional arrangements

The ESS rule changes apply to all ESS interests acquired from 1 July 2009.

The law changes also contain transitional arrangements that apply to some ESS interests that were acquired before 1 July 2009. There were no employer reporting obligations under the previous law. However, you will need to know how the transitional provisions apply to shares and rights provided under the previous law to fulfil your reporting obligations under the rule changes.

When the rule changes apply

The rule changes apply to ESS interests that are qualifying shares or rights your employee acquired before 1 July 2009 if:

your employee has not elected to be taxed upfront under the previous rules
a cessation time has not happened to the shares or rights before 1 July 2009.

Example 9: Requirement to report under transitional arrangements

Sam acquires 2,000 qualifying options from her employer, Aztec Ltd, on 12 May 2008, under an ESS. She does not elect to be taxed upfront. On 8 April 2012 Sam, who is still employed by Aztec Ltd exercises her options. Under the transitional arrangements, Aztec Ltd must report on these options.

Aztec Ltd would be required to report on these options even if Sam had elected to be taxed upfront.

When the rule changes do not apply

The ESS rule changes do not apply to an employee who acquired ESS interests before 1 July 2009 if they were:

non-qualifying shares or rights
qualifying shares or rights, and your employee elected to be taxed upfront under the previous rules
qualifying shares or rights, and a cessation time had happened to the shares or rights before 1 July 2009.

In these cases, the previous law will continue to apply.

Example 10: No requirement to report

Adrian acquires 750 non-qualifying rights from his employer, Begone Ltd, on 27 September 2007, under an ESS. As the rights are non-qualifying he is taxed in the year of acquisition. Begone Ltd is not required to report on these rights, even if they are exercised after 30 June 2009.

For more information about the application of the previous rules, refer to Employee share schemes - answers to frequently asked questions by employees.

Deferred taxing point

Transitioned ESS interests will have a deferred taxing point that is determined by reference to the cessation time worked out using the previous law. The market value of the ESS interests at the deferred taxing point is worked out using the changed law.

The 30-day rule will also apply; therefore, if your employee disposes of their ESS interest (or the share acquired on exercise of the right) within 30 days after the deferred taxing point, the deferred taxing point becomes the date of that disposal.

Example 11: Options acquired before 1 July 2009 and transitioned into the changed rules

On 18 May 2007, Hillary acquires 10,000 options in her employer, Diesel Ltd, under an ESS. The options are qualifying rights, have an exercise price of $0.27 each and an expiry date of 18 May 2013.

Hillary does not elect to be taxed upfront. On 10 March 2012, she exercises her options.

Under the transitional arrangements, the deferred taxing point for ESS interests that are transitioned into the changed rules is determined with reference to the cessation time under the previous rules. Therefore, 10 March 2012 is the deferred taxing point for these options.

The market value of the options is determined to be $0.58 by the changed rules. As Hillary has no other costs for the options, the discount at the deferred taxing point is $3,100 [10,000 x ($0.58 less $0.27)].

Hillary has no other ESS events in 2011-12.

On 12 July 2012, Diesel Ltd gives Hillary an ESS statement as follows:

Diesel Ltd ESS statement with $3,100 at label G

Hillary has to complete item 12 Employee share schemes on her 2012 tax return. She writes:

$3,100 at label G Assessable discount on shares acquired pre-1 July 2009 and 'cessation time' occurred during the financial year
$3,100 at label B Total assessable discount amount as she has no other ESS interests.

Diesel Ltd includes $3,100 at Discount on ESS interests acquired pre-1 July 2009 and 'cessation time' occurred during the financial year, when reporting Hillary's details to us in the ESS annual report.

Timeline of events

18 May 2007	Diesel Ltd provides Hillary with 10,000 qualifying options, with an exercise price of $0.27 each and an expiry date of 18 May 2013.
18 May 2007	Hillary does not elect to be taxed upfront.
10 March 2012	Hillary exercises her options.
	This is the deferred taxing point (determined by reference to the cessation time under the previous rules).
	The market value at the deferred taxing point is $0.58 (determined by the changed rules).
	The discount at the deferred taxing point is $3,100.
12 July 2012	Diesel Ltd gives Hillary her ESS statement.
14 August 2012	Diesel Ltd lodges a completed ESS annual report with us.

Refund of tax for forfeiture of an ESS interest

The previous law may continue to apply if a right is forfeited or lost on or after 1 July 2009. The provisions for the forfeiture of an ESS interest under the law changes will be treated as having been met, if the relevant conditions under the previous law are met.

Calculating the discount for a transitioned ESS interest

The law changes apply to calculating the amount of the discount to be included in assessable income for a transitioned ESS interest.

Reporting requirement for transitional arrangements

The rule changes about your reporting apply to all qualifying shares or rights acquired before 1 July 2009 if no cessation time had occurred before 1 July 2009, whether or not your employee has made an election. You must report the discount on ESS interests acquired before 1 July 2009 that a cessation time occurred during the income year, whether or not your employee has made an election.

No TFN withholding

You do not need to withhold tax if your employee has not given you their TFN or their ABN for shares or rights that have been transitioned into the changed rules.

Other transitional rules

The law changes also modified the way it applies to:

foreign employment
the acquisition date of some shares or rights for certain capital gains tax (CGT) purposes
certain shares or rights, for the meaning of an employment termination payment.

Indeterminate rights

The rule changes apply to rights acquired before 1 July 2009 that became rights to qualifying shares after 30 June 2009. If a possible cessation time happens to those rights after 30 June 2009, (whether or not your employee has made an election), you must provide an ESS statement to your employee and to us for the income year that the possible cessation time occurs in.

There is no reporting requirement if the rights are not qualifying or if the cessation time for the rights occurred before 1 July 2009.

Deduction by employers

Generally, there is no deduction available for you if you issue ESS interests to your employees. However, the ESS rule changes provide you with a limited specific deduction.

If you provide ESS interests under an upfront scheme that meets the requirements for eligibility for the $1,000 reduction, a deduction equal to the amount of the upfront concession is available to you up to a maximum of $1,000.

The deduction is available regardless of whether your employee receiving the ESS interests has met the income test.

A general deduction may be available if ESS interests are provided through a share trust. For more information, see Share trusts.

ESS interests provided to an associate

The ESS rules treat ESS interests provided to an associate of your employee as if they were acquired by your employee, rather than their associate.

Depending on the type of scheme and individual circumstances, your employee will have to pay tax, either upfront or at the deferred taxing point. Once tax has been paid under the ESS rules and the interests move into the CGT system, any future capital gain or capital loss incurred on these interests is borne by the associate.

You must provide a statement to your employee, rather than to their associate, to fulfil your reporting requirements.

Share trusts

If you provide shares to your employee through a trust, and your employee has an interest in a specific number of shares in the trust (rather than specific shares), we treat your employee as holding a beneficial interest in each of that number of shares.

If this is the case, when fulfilling your reporting obligations, you must give an ESS statement to all your employees who have acquired shares through that trust and include this information on the statement you provide to us.

You will not be required to provide a statement to the trustee of the share trust. The trustee of the share trust will not be required to provide a statement to its beneficiaries.

Example 12: Employee share trust and reporting

Lee works for Gag Ltd. Gag Ltd has an ESS that provides Lee with shares through its employee share trust, Gag Share Trust. Gag Ltd is the provider and Gag Ltd, rather than Gag Share Trust, must report to their employees and us.

General deduction for employers

A general deduction may be available for you if you provide money or other property to an employee share trust to enable it to acquire securities to provide to your employees.

The deduction would generally be available to you in the income year that the money was paid to the share trust. However, the ESS rules defer the timing of the deduction until your employee acquires the ESS interest.

What to read / do next

For more information about employee share schemes and how to meet your reporting obligations, visit Employee share schemes - home.

It provides documents about:

market value
real risk of forfeiture
genuine disposal restrictions
reporting requirements.

Last Modified: Monday, 7 January 2013

Our commitment to you

We are committed to providing you with accurate, consistent and clear information to help you understand your rights and entitlements and meet your obligations.

If you follow our information and it turns out to be incorrect, or it is misleading and you make a mistake as a result, we will take that into account when determining what action, if any, we should take.

Some of the information on this website applies to a specific financial year. This is clearly marked. Make sure you have the information for the right year before making decisions based on that information.

If you feel that our information does not fully cover your circumstances, or you are unsure how it applies to you, contact us or seek professional advice.

Copyright

You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products)