Employee share schemes - guide for employees

Introduction

The tax rules for employee share schemes (ESS) have recently changed and the new rules apply from 1 July 2009.

This is a general guide to explain how the new law applies to employee share scheme interests (ESS interests) you acquire under an employee share scheme (ESS).

The tax law contains specific rules for the taxation of ESS interests. The rules apply to shares, stapled securities and rights (including options) to acquire shares and stapled securities. Where you acquired ESS interests at a discount under an employee share scheme, the discount is taxed under these rules.

Where you did not acquire ESS interests at a discount, the employee share scheme tax rules do not apply. However, the benefits given in relation to these ESS interests may be taxed under other provisions of the tax law such as the capital gains tax regime.

For more information on capital gains tax, refer to the Guide to capital gains tax.

Terms you need to understand

Term	Definition
$1,000 upfront tax concession	If you acquire ESS interests under a taxed-upfront scheme that meets certain conditions, you will be eligible to receive a tax concession of up to $1,000 if your taxable income after adjustments is $180,000 or less.
30-day rule	If you dispose of your 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.
Associate	Associates include people and entities closely associated with you, such as relatives, or closely connected companies or trustees of a trust (other than the trustee of an employee share trust). For example, a partner in a partnership is an associate of the partnership and an individual's spouse is an associate of the individual. You may also be an associate of a self-managed super fund in which you are a member or a family trust of which you are a beneficiary. For a comprehensive definition of the term 'associate' see section 318 of the Income Tax Assessment Act 1936.
Capital gains tax	Capital gains tax (CGT) is the tax you pay on a capital gain. It is not a separate tax, just part of your income tax. The most common way you make a capital gain (or capital loss) is by selling or disposing of assets such as real estate, shares or managed fund investments.
Cessation time	This 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 when you acquire them. However there could be restrictions or conditions related to those shares that make the cessation time a later date. The cessation time for rights is generally the time when you exercise or dispose of the rights, or the time when the employment under which you received the right ends. However, there could be restrictions or conditions, related to the share that you receive when you exercise the right, that will make the cessation time a later date. Cessation time is defined in section 139CA, 139CB and 139DSH of Division 13A of the Income Tax Assessment Act 1936.
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 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, and the cost to you to preserve or defend your title or rights to it. The cost base for a share may need to be reduced by the amount of any non-assessable payment you receive from the company. Cost base is explained in Subdivision 110-A of the Income Tax Assessment Act 1997.
Deferred taxing point	If you acquire ESS interests under a tax-deferred scheme and you satisfy certain conditions, your discount will be calculated at the deferred taxing point and you will be assessed on the discount in the year in which the deferred taxing point occurs. Further information is available on the deferred taxing point for shares and the deferred taxing point for rights.
Discount	If you receive ESS interests under a taxed-upfront employee share scheme, and you did not pay anything to receive them or you paid less than the market value, the difference between what you paid and the market value is known as the 'discount'. If you paid nothing to receive the ESS interests, your 'discount' will be the market value of the ESS interests when you received them. If you acquired 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.
Election	Before 1 July 2009, in certain circumstances, you were able to choose when you paid the tax on your shares and rights acquired under an ESS. The choice to pay tax on your employee share scheme shares and rights in the financial year in which you acquired them was known as an 'election'. You could only choose to make an 'election' where certain conditions were met.
Employee share scheme	An employee share scheme is a scheme under which shares, stapled securities and rights (including options) to acquire shares and stapled securities in a company are provided to its employees (including current, past or prospective employees and their associates) in relation to their employment.
ESS annual report	The report that your employer will provide to the Australian Taxation Office (ATO) with information on discounts that you or your associates have received on your ESS interests either directly or through an employee share trust.
ESS interests	Shares, stapled securities, or rights (including options) to acquire shares or stapled securities
ESS statement	Your employer will give you an employee share scheme statement (ESS statement) which will show an estimate of any discounts you or your associates have received on your ESS interests either directly or through an employee share trust.
Indeterminate rights	A right to acquire at a future time either: shares or cash (at the discretion of your employer), or a number of shares, where that number cannot be determined at the time of acquisition of the right but will be determined at a later time.
New law, including transitional arrangements	Division 83A of the Income Tax Assessment Act 1997, which 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, which 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 receive an option, you make an agreement with the provider of the option, allowing you to buy shares or stapled securities during a certain time period, for a particular price (the exercise price). You then have the right but not the obligation to exercise the option.
Previous law	Division 13A of Part III of the Income Tax Assessment Act 1936, which provided for the taxation 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 satisfies the following requirements: you acquire the share under an employee share scheme the company is your employer or your employer's holding company the shares available from the employee share scheme are ordinary shares after acquiring the share, you do not hold a legal or beneficial interest of more than 5% of the shares in the company after acquiring the share, you are not in a position to cast, or control the casting of, more than 5% of the votes at the company's general meeting, and when you acquired the share, at least 75% of the permanent employees of your employer were, or at some earlier time had been, entitled to acquire shares from an employee share scheme of your employer or its holding company. A qualifying right must satisfy all of the above requirements, except for the last.
Reportable fringe benefits	Your employer must record the grossed-up taxable value of certain fringe benefits provided to you on your payment summary. This amount is known as your reportable fringe benefits amount. The total reportable fringe benefits amounts you receive from all your employers for a year is called your reportable fringe benefits total. For more information on reportable fringe benefits, see Reportable fringe benefits - facts for employees.
Reportable superannuation contributions	These are the sum of any contributions that you make to your superannuation fund for which you can claim a deduction in the financial year under Subdivision 290-C of the Income Tax Assessment Act 1997, and the contributions your employer makes for you, where the following apply: you influenced the rate or amount of superannuation your employer contributes for you, and the contributions are additional to the compulsory contributions your employer must make for you under any of the following superannuation guarantee law an industrial agreement the trust deed or governing rules of a superannuation fund a federal, state or territory law.
Salary-sacrifice arrangement	This is an arrangement where your employer provides you with an ESS interest: because you agreed to acquire the ESS interest in return for a reduction in salary or wages that would not have happened apart from the agreement, or as part of your remuneration package, in circumstances where it is reasonable to conclude that your 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.
Tax-deferred scheme	Generally, you will pay tax on the discount you receive when you acquire ESS interests in the financial year in which you acquired them. However, in certain circumstances, you may defer paying the tax for a period of up to seven years. Employee share schemes that allow you to defer paying tax are known as 'tax-deferred schemes'.
Taxable income after adjustments	Your taxable income for the year after adjustments is the sum of: taxable income reportable fringe benefits total reportable superannuation contributions total net investment loss.
Total net investment loss	The sum for the financial year of: the amount by which the individual's deductions from financial investments are greater than their income from those investments, and the amount by which the individual's rental property deductions are greater than their rental property income.

Participating in an ESS

From 1 July 2009, your employer may offer you the opportunity to participate in one or more employee share schemes. You may participate in as many schemes as your employer will allow and they will tell you the types of schemes being offered.

The type of scheme you participate in and in some cases your personal circumstances, will determine the way in which any discount you receive is treated for tax purposes. Once you have received ESS interests under a particular scheme, you cannot choose the way in which any discount you received is treated for tax purposes.

The details of each type of scheme are explained below.

Types of ESS and tax consequences of participating in each

There are different types of employee share schemes that your employer may offer:

taxed-upfront scheme - not eligible for reduction
taxed-upfront scheme - eligible for $1,000 reduction
tax-deferred scheme - salary sacrifice
tax-deferred scheme - real risk of forfeiture.

Taxed-upfront scheme - not eligible for reduction (default tax position)

If you acquire ESS interests where the employee share scheme does not meet the conditions for a tax-deferred scheme or satisfy eligibility requirements for the $1,000 reduction, the total discount you receive will be assessable in the financial year you acquired the ESS interests.

Taxed-upfront scheme - eligible for reduction

If you acquire ESS interests under an employee share scheme and certain conditions are satisfied, including personal conditions, you may be able to reduce the discount that must be included in your assessable income in the financial year you acquired the ESS interests by up to $1,000.

In order to access the $1,000 reduction, you will need to satisfy an income test. You also must not hold more than 5% ownership of the company, or control more than 5% of the voting rights in the company after acquiring the ESS interests. For more information on the income test, refer to Income test for the upfront concession - $1,000 reduction.

Tax-deferred scheme - salary sacrifice

Where you acquire no more than $5,000 worth of shares or stapled securities in your employer (or any holding company of your employer) under salary-sacrifice arrangements and the scheme meets certain other conditions, the tax on the discount will be deferred until the deferred taxing point occurs.

You will also need to consider your individual circumstances, that is, you must not hold more than 5% ownership of the company, or control more than 5% of the voting rights in the company after acquiring the ESS interests.

Tax-deferred scheme - real risk of forfeiture

Where you acquire ESS interests that are at a real risk of forfeiture and the scheme meets certain other conditions, the tax on the discount will be deferred until the deferred taxing point occurs.

You will also need to consider your individual circumstances, for example, you must not hold more than 5% ownership of the company, or control more than 5% of the voting rights in the company after acquiring the ESS interests.

In certain circumstances you will not be able to defer taxation even though you have participated in a tax-deferred scheme. You need to consider your individual circumstances to determine whether your ESS interests are in fact at a real risk of forfeiture.

For example, where the scheme provides good-leaver provisions, your individual circumstances may determine that your ESS interests are not at a real risk of forfeiture. For more information on real risk of forfeiture, refer to Real risk of forfeiture.

Deferred taxing point

If you acquire ESS interests under a tax-deferred scheme, you will be assessed for tax purposes in the year in which the deferred taxing point occurs. The amount assessed will be the market value of the ESS interests at the deferred taxing point, reduced by the cost base of the ESS interests.

Deferred taxing point for shares

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

seven years after you acquired the share
when you cease the employment in respect of which you acquired the share
when there is no real risk of forfeiture and the scheme no longer genuinely restricts the disposal of the share.

Deferred taxing point for rights

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

seven years after you acquired the right
when you cease the employment in respect of which you acquired the right
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.

The 30-day rule

This rule applies to tax-deferred schemes. It does not apply to taxed-upfront schemes.

Where you have disposed of an ESS interest (or the share you acquire on exercise of a right) within 30 days after a deferred taxing point occurred, the date of that disposal becomes the deferred taxing point (this is called the 30-day rule).

For example, a deferred taxing point occurs on 10 March 2012 and the employee disposes of the ESS interest on 29 March 2012. As the disposal is within 30 days, the deferred taxing point will be 29 March 2012.

Indeterminate rights

When you acquire a right from an employer, your entitlement to a share or a specific number of shares may be uncertain. This is known as an indeterminate right. For example, you could be given a right to acquire, at a future time:

shares with a specified total value, rather than a specified number of shares
a number of shares to be determined at a later time, or
either shares or cash (at the discretion of your employer).

If and when it becomes clear that the right will result in the receipt of a share or a specified number of shares, the law will apply as if the right had always been a right to acquire the share (or the specified number of shares) from the time that you acquired the original right.

Example 1: Indeterminate rights

Vesna is employed by Bright Heart Ltd. On 14 April 2010, Bright Heart Ltd provides Vesna with a right to acquire either shares in the company or cash, to be determined by Bright Heart Ltd at some time in the future. Vesna pays no consideration for this right. Vesna does not receive any other ESS interests in 2009-10.

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

When Vesna acquires the right she doesn't have rights to shares, as her employer has not determined that she will definitely receive shares.

On 10 May 2013, Bright Heart Ltd decides to give Vesna 600 shares to satisfy her right. Her original right is now treated as if it had always been rights to acquire 600 shares from the time it was acquired on 14 April 2010. Those rights were acquired under a taxed-upfront scheme eligible for reduction. The market value of the rights on 14 April 2010 was $4,000. As Vesna paid no consideration for the right, the discount on the rights is $4,000.

As the rights to shares were acquired under a taxed upfront scheme eligible for reduction, and the discount is included in Vesna's assessable income in the acquisition year, Bright Heart Ltd must give Vesna an amended ESS statement for the 2009-10 financial year, within 30 days of Bright Heart Ltd determining that Vesna will definitely receive shares.

On 20 May 2013, Bright Heart Ltd gives Vesna an amended ESS statement as follows:

Bright Heart Ltd also gives an amended ESS annual report to the ATO on 20 May 2013, for 2009-10, including the following information when reporting Vesna's details:

600 at Number of ESS interests from taxed upfront schemes - eligible for reduction, and
$4,000 at Discount from taxed upfront schemes - eligible for reduction.

Ordinarily, Vesna's assessments can only be amended within a two-year period. However, the ESS rules for indeterminate rights provide that Vesna's assessment can be amended at any time to include the discount in the 2009-10 financial year.

Vesna amends item 12 Employee share schemes on her 2010 tax return. She writes $4,000 at D Discount from taxed upfront schemes - eligible for reduction.

After adjustments for reportable fringe benefits, reportable superannuation contributions and total net investment loss, Vesna's taxable income is $120,000. As Vesna's personal circumstances and her taxable income after adjustments allow her to meet the income test, and the scheme meets certain conditions, Vesna is eligible for the upfront concession of $1,000.

Vesna writes $3,000 ($4,000 total discount less $1,000 concession) at B Total assessable discount amount. She lodges her amended tax return with the ATO on 6 June 2013.

Timeline of events

Date	Event
14 April 2010	Bright Heart Ltd gives Vesna a right to acquire either shares in the company or cash, to be determined by Bright Heart Ltd at some time in the future, for no consideration.
10 May 2013	Bright Heart Ltd decides to give Vesna 600 shares to satisfy her right. The right that Vesna acquired on 14 April 2010 is now treated as if it had always been rights to acquire 600 shares. The rights had a market value at acquisition of $4,000.
20 May 2013	Bright Heart Ltd gives an amended ESS statement to Vesna and an amended ESS annual report to the ATO, for 2009-10, within 30 days of deciding to give Vesna shares to satisfy her rights.
6 June 2013	Vesna lodges her amended tax return for 2009-10.

What to expect from your employer

Your employer will tell you if you are eligible to participate in an employee share scheme. They will also tell you whether the employee share scheme or schemes offered meet the criteria for taxed-upfront or tax-deferred schemes. This will help you work out whether you will need to pay tax on any discounts received in the year in which you acquire the ESS interests or at some later time. Your employer will also tell you whether the employee share scheme or schemes offered meet the criteria to access the $1,000 concession.

Your employer will also give you an ESS statement detailing the ESS interests you acquired throughout the financial year.

Your employer is required to pay withholding tax where you choose not to give them your tax file number or Australian business number before the end of the financial year in which you are required to pay tax on discounts you receive. For more information on withholding tax, see below.

Tax file number (TFN) withholding for ESS

The withholding tax rules will not affect you if you have already given your employer a TFN declaration.

If you acquire ESS interests at a discount, withholding tax will apply to your discount amounts unless you give your employer your tax file number (TFN) or Australian business number (ABN) by the end of the financial year in which you are required to include your discount from your ESS interests.

Where withholding tax applies, your employer is required to remit the tax to the Commissioner. The rate of withholding tax is the highest individual tax rate plus the Medicare levy for the relevant financial year. See Individual income tax rates for current tax rates.

As an employee share scheme benefit is not a cash benefit, your employer may recover from you the amount of withholding tax paid. Your employer can do this by offsetting the amount of withholding tax paid against any other amounts owed to you, such as salary and wages.

You can claim a credit for the amount of withholding tax paid on your tax return. The total amount of withholding tax paid for which you can claim a credit will appear on your ESS statement.

Example 2: Taxed upfront scheme - not eligible for reduction, TFN withholding tax

Nadia is employed by Red Bank Ltd and acquires 800 Red Bank Ltd shares in a taxed-upfront scheme not eligible for reduction on 23 September 2009.

The total market value of the shares is $4,800. Nadia is only required to pay $3,600 to purchase the shares; therefore, she receives a discount of $1,200 ($4,800 less $3,600).

By the end of 2009-10 (that is, 30 June 2010) Nadia has not given her TFN to Red Bank Ltd. As a result, Red Bank Ltd must pay withholding tax on the discount given to Nadia. Red Bank Ltd must pay this to the Commissioner no later than 21 days after the end of the financial year.

For 2009-10, the rate of withholding is 46.5%. This means that Red Bank Ltd must pay $558 withholding tax ($1,200 discount multiplied by 46.5%).

Red Bank Ltd may recover the amount of the withholding tax from any amounts owed to Nadia. In this case, Nadia and Red Bank Ltd agree that the amount will be deducted from her next salary payment.

On 9 July 2010 Nadia's employer, Red Bank Ltd, gives Nadia an ESS statement as follows:

On 15 July 2010 Red Bank Ltd sends payment of the $558 withholding tax to the ATO.

Nadia has to complete item 12 Employee share schemes on her 2010 tax return. She writes:

$1,200 at E Discount from taxed upfront schemes - not eligible for reduction
$558 at C TFN amounts withheld from discounts, and
$1,200 at B Total assessable discount amount as Nadia has no other ESS interests.

Nadia lodges her tax return with the ATO at the end of August 2010.

When the ATO assesses Nadia's 2010 tax return, she will receive a tax credit of $558 which is the amount of withholding tax paid by Red Bank Ltd.

Red Bank Ltd includes the following information when reporting Nadia's details in the ESS annual report:

The number of shares acquired, 800, at Number of ESS interests from taxed upfront schemes not eligible for reduction,
$1,000 at Discount from taxed upfront schemes - not eligible for reduction, and
$558 at TFN amounts withheld from discounts.

Timeline of events

Date	Event
23 September 2009	Nadia acquires 800 shares with total market value of $4,800.
	Discount of $1,200 offered by Red Bank Ltd
	Nadia pays Red Bank Ltd the discounted amount of $3,600.
1 July 2010	Nadia has not quoted her TFN to Red Bank Ltd by the end of the financial year therefore Red Bank Ltd must pay $558 withholding tax on the discount on Nadia's shares. Nadia agrees that the amount will be deducted from her next salary payment.
9 July 2010	Red Bank Ltd gives Nadia her ESS statement.
15 July 2010	Red Bank Ltd sends payment of the withholding tax to the ATO within 21 days of the end of the financial year.
11 August 2010	Red Bank Ltd gives a completed ESS annual report to the ATO by 14 August 2010.
End of August 2010	Nadia lodges her tax return.

Example 3: Tax-deferred scheme, TFN withholding tax

Shane is employed by Blue Ltd and acquires 400 Blue Ltd shares in a tax-deferred scheme on 30 July 2009.

Shane will forfeit the shares if he ceases employment before 22 March 2012. The shares are at a real risk of forfeiture. Shane is only required to pay $1,200 to purchase the shares, which is at a discount to their market value. On 22 March 2012, there is no longer a real risk of Shane forfeiting his shares and the deferred taxing point occurs. The market value of the shares on 22 March 2012 is $2,600. The only cost that Shane has in relation to the shares is the $1,200 that he paid Blue Ltd to acquire the shares. This is the cost base for Shane's shares. Therefore, the amount to be included at the deferred taxing point is $1,400 ($2,600 less $1,200). This amount is also referred to as the discount.

By the end of the 2011-12 financial year, Shane has not quoted his TFN to Blue Ltd. As a result, Blue Ltd must pay withholding tax on the amount (the discount). Blue Ltd must pay this to the Commissioner no later than 21 days after the end of the financial year.

For the purpose of this example, let us assume that for 2011-12 the rate of withholding tax is 46.5%. Thus Blue Ltd must pay withholding tax of $651($1,400 discount multiplied by 46.5%).

Blue Ltd may recover the amount of the withholding tax from any amounts owed to Shane. In this case, Shane and Blue Ltd agree that the amount will be deducted from his next wage payment.

On 12 July 2012 Blue Ltd gives Shane an ESS statement as follows:

On 18 July 2012 Blue Ltd sends payment of the $651 withholding tax to the ATO.

Shane has to complete item 12 Employee share schemes on his 2012 tax return. He writes:

$1,400 at F Discount from deferral schemes
$651 at C TFN amounts withheld from discounts
$1,400 at B Total assessable discount amount as Shane has no other ESS interests.

Shane lodges his tax return with the ATO at the end of September 2012.

When the ATO assesses Shane's 2012 tax return, he will receive a tax credit of $651, which is the amount of withholding tax paid by Blue Ltd.

Blue Ltd must include the following information when reporting Shane's details in their ESS annual report:

$1,400 at Discount from deferral schemes,
400 at Number of ESS interests with a deferred taxing point during the year, and
$651 at TFN amounts withheld from discounts.

Timeline of events

Date	Event
30 July 2009	Shane acquires 400 shares.
30 July 2009	Shane pays Blue Ltd $1,200.
22 March 2012	The deferred taxing point occurs. The market value of the shares is $2,600 and the cost base is $1,200, so the amount to be included in Shane's assessable income (also referred to as the discount) is $1,400.
1 July 2012	Shane has not given his TFN to Blue Ltd by the end of the financial year (30 June 2012) therefore Blue Ltd must pay withholding tax of $651 on the discount. Shane agrees that this amount will be deducted from his next wages payment.
18 July 2012	Blue Ltd sends payment of the withholding tax to the ATO within 21 days of the end of the financial year.
11 August 2012	Blue Ltd gives a completed ESS annual report to the ATO by 14 August 2010.
End of September 2012	Shane lodges his tax return.

ESS statement

Your employer will give you an ESS statement which will show an estimate of any discounts you or your associates have received on your ESS interests either directly or through an employee share trust. Your ESS statement will show:

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

Your employer must give you an ESS statement by 14 July after the end of the relevant financial year. This ESS statement will help you complete your tax return.

Completing your tax return

You will need your ESS statement from each employer with whom you participated in an employee share scheme, in order to complete your tax return.

Market value

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

Your employer will give you an estimate of the discount you have received based on the market value of the ESS interests.

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 of acquisition. You can choose to use this methodology or determine market value according to its ordinary meaning when valuing unlisted rights.

Income test for the upfront concession - $1,000 reduction

If you have participated in a taxed-upfront scheme eligible for $1,000 reduction, you may be able to reduce your taxable income by up to $1,000.

In order to access the $1,000 reduction, you must:

participate in a taxed-upfront scheme eligible for $1,000 reduction
have a taxable income after adjustments in the financial year of $180,000 or less, and
not hold more than 5% ownership of the company, or control more than 5% of the voting rights in the company after acquiring the ESS interests.

At the time you participate in an employee share scheme you may not know whether you meet the income test. You will calculate your taxable income after adjustments when you complete your tax return for the year.

Calculating your taxable income after adjustments

When preparing your tax return, you must calculate your taxable income after adjustments for the financial year in order to determine whether you are able to access the $1,000 reduction.

You calculate your taxable income after adjustments for the financial year by adding your:

taxable income (including the total amount of all ESS discounts)
reportable fringe benefits total (if any)
reportable superannuation contributions (if any), and
total net investment loss.

If your taxable income after adjustments is $180,000 or less, you will reduce your employee share scheme discount amount by up to $1,000. You cannot use the $1,000 reduction to reduce your discount amount from a taxed-upfront scheme eligible for reduction to less than nil.

Example 4: Taxed-upfront scheme - eligible for reduction, employee is eligible for the concession

Gerard works for Oz Bank Ltd and acquires 600 shares in Oz Bank Ltd under an employee share scheme on 29 July 2009.

The total market value of the shares is $3,000. Gerard is required to pay $1,500 to purchase the shares; therefore, he acquires the shares for a discount of $1,500 ($3,000 less $1,500).

On 8 July 2010 Gerard's employer, Oz Bank Ltd, gives Gerard an ESS statement as follows:

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

Gerard has to complete item 12 Employee share schemes on his 2010 tax return. He writes $1,500 at D Discount from taxed upfront schemes - eligible for reduction.

Gerard completes the remainder of his tax return and after adjustments for reportable fringe benefits, reportable superannuation contributions and total net investment loss, his taxable income (including the $1,500 discount) is $91,000.

As Gerard acquired his shares under a taxed-upfront scheme eligible for reduction and his taxable income after adjustments is less than $180,000, Gerard is eligible for the upfront concession of $1,000.

As Gerard has no other ESS interests, he now writes $500 ($1,500 total discount received less $1,000 concession) at B Total assessable discount amount. Gerard lodges his tax return with the ATO by the end of July 2010.

Oz Bank Ltd includes the following information when reporting Gerard's details in their ESS annual report:

the number of shares acquired, 600, at Number of ESS interests from taxed upfront schemes eligible for reduction, and
$1,500 at Discount from taxed upfront schemes - eligible for reduction.

Note: As Oz Bank Ltd will not know Gerard's taxable income after adjustments they report the discount at $1,500, ignoring the $1,000 concession.

Timeline of events

Date	Event
29 July 2009	Gerard acquires 600 shares with a total market value of $3,000.
	Gerard pays Oz Bank Ltd $1500.
	Gerard acquires the shares for a discount of $1,500.
8 July 2010	Oz Bank Ltd gives Gerard his ESS statement.
End of July 2010	Gerard lodges his tax return.
14 August 2010	Oz Bank Ltd gives a completed ESS annual report to the ATO by 14 August 2010.

Example 5: Taxed-upfront scheme - eligible for reduction, employee is not eligible for the concession

Jane works for Star Ltd and acquires 500 shares in Star Ltd under an employee share scheme on 3 July 2009.

The total market value of the shares is $4,000. Jane is required to pay $2,700 to purchase the shares; therefore, she acquires the shares for a discount of $1,300 ($4,000 less $2,700).

On 5 July 2010 Jane's employer, Star Ltd gives Jane an ESS statement as follows:

As Jane has given her TFN to Star Ltd, there is no amount shown in the 'TFN amounts withheld from discounts' field on Jane's ESS statement.

Jane has to complete item 12 Employee share scheme on her 2010 tax return. She writes $1,300 at D Discount from taxed upfront schemes - eligible for reduction.

Jane completes the remainder of her tax return and after adjustments for reportable fringe benefits, reportable superannuation contributions and total net investment loss, her taxable income (including the $1,300 discount) is $200,000.

As Jane's taxable income after adjustments exceeds $180,000, Jane is not eligible for the upfront concession of $1,000.

As Jane has no other ESS interests and she is not entitled to claim the $1,000 concession, she now writes $1,300 at B Total assessable discount amount. Jane lodges her tax return with the ATO by the end of July 2010.

Star Ltd includes the following information when reporting Jane's details in their ESS annual report:

the number of shares acquired, 500, at Number of ESS interests from taxed upfront schemes eligible for reduction, and
$1,300 at Discount from taxed upfront schemes - eligible for reduction.

Note: As Star Ltd will not know Jane's taxable income after adjustments they report the discount at $1,300.

Timeline of events

Date	Event
3 July 2009	Jane acquires 500 shares with a total market value of $4,000.
	Jane pays Star Ltd $2,700
	Jane acquires the shares for a discount of $1,300.
5 July 2010	Star Ltd gives Jane her ESS statement.
End of July 2010	Jane lodges her tax return.
14 August 2010	Star Ltd gives a completed ESS annual report to the ATO by 14 August 2010.

Example 6: Taxed-upfront scheme - eligible for reduction, employee eligible for concession but discount is less than $1,000

Lester works for Kat Ltd and acquires 200 shares in Kat Ltd under an employer share scheme on 25 July 2009.

The total market value of the shares is $2,000. Lester is required to pay $1,300 to purchase the shares; therefore, he acquires the shares for a discount of $700 ($2,000 less $1,300).

On 11 July 2010 Lester's employer, Kat Ltd, gives Lester an ESS statement as follows:

As Lester has given his TFN to Kat Ltd, there is no amount shown in the 'TFN amounts withheld from discounts' field on Lester's ESS statement.

Lester has to complete item 12 Employee share scheme on his 2010 tax return. He writes $700 at D Discount from taxed upfront schemes - eligible for reduction.

Lester completes the remainder of his tax return and after adjustments for reportable fringe benefits, reportable superannuation contributions and total net investment loss, his taxable income (including the $700 discount) is $140,000.

As Lester acquired his shares under a taxed-upfront scheme eligible for reduction and his taxable income after adjustments is less than $180,000, Lester is eligible for the upfront concession. As Lester's discount of $700 is less than $1,000, he is only able to apply $700 of the $1,000 concession, reducing the discount included on his tax return to nil.

As Lester has no other ESS interests he now writes $0 at B Total assessable discount amount. Lester lodges his tax return with the ATO by the end of July 2010.

Kat Ltd includes the following information when reporting Lester's details in their ESS annual report:

the number of shares acquired, 200, at Number of ESS interests from taxed upfront schemes eligible for reduction, and
$700 at Discount from taxed upfront schemes - eligible for reduction.

Note: As Kat Ltd will not know Lester's taxable income after adjustments they report the discount at $700, ignoring the $1,000 concession.

Timeline of events

Date	Event
25 July 2009	Lester acquires 200 shares with a total market value of $2,000.
	Lester pays Kat Ltd $1,300.
	Lester acquires the shares for a discount of $700.
11 July 2010	Kat Ltd gives Lester his ESS statement.
End of July 2010	Lester lodges his tax return.
14 August 2010	Kat Ltd gives a completed ESS annual report to the ATO by 14 August 2010.

Example 7: Taxed-upfront scheme - not eligible for reduction

Landon works for Pepper Pines Ltd and acquires 800 shares in Pepper Pines Ltd under an employee share scheme on 23 September 2009.

The total market value of the shares is $4,800. Landon is required to pay $3,800 to purchase the shares; therefore, he receives a discount of $1,000 ($4,800 less $3,800).

On 9 July 2010 Landon's employer, Pepper Pines Ltd, gives Landon an ESS statement as follows:

As Landon has given his TFN to Pepper Pines Ltd, there is no amount shown in the 'TFN amounts withheld from discounts' field on Landon's ESS statement.

Landon has to complete item 12 Employee share scheme on his 2010 tax return. He writes:

$1,000 at E Discount from taxed upfront schemes - not eligible for reduction
$1,000 at B Total assessable discount amount as he has no other ESS interests.

Landon lodges his tax return with the ATO at the end of August 2010. Landon is not eligible for an upfront concession of $1,000 as the concession does not apply to this employee share scheme.

Pepper Pines Ltd includes the following information when reporting Landon's details in their ESS annual report:

the number of shares acquired, 800, at Number of ESS interests from taxed upfront schemes not eligible for reduction, and
$1,000 at Discount from taxed upfront schemes - not eligible for reduction.

Timeline of events

Date	Event
23 September 2009	Landon acquires 800 shares with a total market value of $4,800.
	Landon pays Pepper Pines Ltd $3,800.
	Landon acquires the shares for a discount of $1,000.
9 July 2010	Pepper Pines Ltd gives Landon his ESS statement.
11 August 2010	Pepper Pines Ltd gives a completed ESS annual report to the ATO by 14 August 2010.
End of August 2010	Landon lodges his tax return.

Forfeiture or loss of ESS interests

If you have included a discount you received under an employee share scheme in your assessable income in relation to your ESS interests and your interests are:

subsequently forfeited, or
in the case of a right, forfeited, lapsed, expired or lost (without the right having been disposed of or exercised),
you may be entitled to exclude the discount from your assessable income and receive a refund of any tax paid in relation to those interests.

For ESS interests acquired on or after 1 July 2009 you may only exclude the discount if:

the conditions of the scheme did not have the direct effect of protecting you (the employee) from a fall in the market value of the interest, and
you had no choice but to forfeit or lose the ESS interests (except where the choice was to cease employment).

If you are entitled to exclude the discount, you are treated as never having acquired your ESS interests. You will need to amend your tax return for the financial year in which the discount was included. There is no time limit for amending a tax return to exclude this amount from your assessable income.

Example 8: Choice not to exercise rights - no refund

Leigh is granted rights to acquire shares in his employer Welding Ltd under an ESS in the 2010 income year. The scheme is a taxed-upfront scheme - not eligible for reduction.

The rights are exercisable on payment of the exercise price and will lapse if not exercised by 10 May 2012.

Leigh includes the discount in his 2010 income tax return.

In the 2012 financial year, the market value of Welding Ltd shares falls dramatically and by May 2012, it is below the exercise price.

Leigh decides not to exercise the rights and they subsequently lapse.

As Leigh has chosen not to exercise the rights, he is not entitled to exclude the discount he included in his 2010 assessment.

ESS interests acquired by your associates

If an associate acquires ESS interests which are provided in relation to your employment or services, the ESS rules require you (rather than your associate) to include the discount in your assessable income. Your associates can be your spouse, child, company or trustee of a trust (other that the trustee of an employee share trust).

If you have included a discount in your assessable income in relation to the ESS interests and the ESS interests are subsequently forfeited or lost, you will be entitled to exclude the discount from your assessable income (rather than the assessable income of your associate), provided the conditions for obtaining a refund are met.

Your employer will give you an ESS statement which includes ESS interests provided to your associates. You will need this statement to help you complete your tax return.

Example 9: Taxed upfront scheme - eligible for reduction, ESS interests acquired by an associate

In example 6, assume that instead of Lester receiving the shares in his own name, the shares are acquired by his spouse, Margaret.

As the shares are provided in relation to Lester's employment and therefore are part of his income, Lester will include the discount on his own tax return. Margaret will not need to include the discount on her tax return.

As the shares are in Margaret's name, not Lester's name, Margaret has ownership of them. Therefore, once they have been included in Lester's income under the employee share scheme rules, they no longer have any connection to Lester.

For CGT purposes, Margaret is taken to have acquired the shares at market value, which is $2,000.

If Margaret incurs any additional costs in relation to the shares, they can be added to the $2,000 to form the cost base. When Margaret disposes of the shares, the cost base will be used to calculate any subsequent gains or losses on the shares.

These gains or losses will be recognised under the CGT regime and recorded only on Margaret's tax return. Lester will not need to include anything on his tax return in relation to the capital gain or capital loss.

Employee share trusts

If you acquire ESS interests through an employee share trust, and you have an interest in a specific number of ESS interests (rather than specific ESS interests), we treat you as holding a beneficial interest in each of that number of ESS interests.

Your employer will include all ESS interests you acquire through an employee share trust on your ESS statement.

Foreign sourced ESS interests

If you are an Australian resident taxpayer, you are required to pay Australian income tax on all discounts you receive under an employee share scheme regardless of whether you received it in relation to employment in Australia or outside Australia. However, this rule may be modified by Australia's double tax treaties and the temporary resident rules. For further information, see Foreign income exemption for Australian residents and temporary residents - employee share schemes.

If you are a foreign resident taxpayer, you are only subject to Australian income tax on discounts you receive under an employee share scheme to the extent that the discount relates to employment in Australia.

ESS and capital gains tax

In most cases, ESS interests are exempt from CGT implications until the interest has been taxed under the employee share scheme rules (the primary taxing regime for ESS interests).

Once an ESS interest has been taxed under the employee share scheme rules, it is then taxed under the CGT regime or other regimes such as the trading stock rules. There are also special CGT provisions for employee share trusts.

CGT treatment of an ESS interest after the deferred taxing point

For an ESS interest that is taxed upfront, the interest is taken to have been acquired for its market value at the time it was originally acquired.

For an ESS interest for which tax is deferred, the ESS interest (and the share or right that it forms part of) is taken to have been re-acquired immediately after the deferred taxing point. This resets the cost base of the ESS interest to its market value at this time, and resets the acquisition time, which will be relevant to your eligibility for the 50% CGT discount.

Once an ESS interest has been taxed under the employee share scheme rules, and the interest is taken to have been acquired (or re-acquired) at its market value, it is then taxed under the CGT regime or other regimes such as the trading stock rules.

Example 10: Taxed-upfront scheme - eligible for reduction, CGT treatment of an ESS interest after the taxing point

In example 5, the market value of the shares that Jane acquired under a taxed-upfront scheme eligible for reduction was $4,000.

For CGT purposes, Jane is taken to have acquired the shares at market value. Therefore, the cost of the shares at the time of upfront taxation, which is also the time the shares are acquired, is $4,000.

If Jane incurs any additional costs in relation to the shares, they can be added to the $4,000 to form the cost base. If Jane chooses to dispose of the shares, the cost base will be used to calculate any subsequent gains or losses on the shares.

These gains or losses will be recognised under the CGT regime and recorded on Jane's tax return.

ESS benefits acquired before 1 July 2009

The new ESS rules apply to all ESS interests acquired from 1 July 2009.

The new law also contains transitional arrangements that will apply to some ESS interests that were acquired before 1 July 2009. These ESS interests are known as transitioned interests. Under transitional arrangements, some of the old rules are preserved while some new rules do not apply, or are modified in the way that they apply to a transitioned interest.

The previous law will continue to apply to shares, stapled securities or rights to shares, or rights to stapled securities not brought within the new law.

When the new ESS rules do not apply

The new ESS rules do not apply to your ESS interests, if you acquired them before 1 July 2009 and they were:

non-qualifying shares or rights
qualifying shares or rights, and you elected to be taxed upfront under the previous law, or
qualifying shares or rights, and a cessation time had happened to the shares or rights before 1 July2009.

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

For more information on how to apply the previous law, see Employee share schemes - answers to frequently asked questions by employees.

When the new ESS rules do apply

The new law applies to ESS interests that are qualifying shares or rights you acquired before 1 July 2009 if:

you did not elect to be taxed upfront under the previous law, and
a cessation time did not happen to the shares or rights before 1 July 2009.

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 new law.

The new 30-day rule will also apply so that if you dispose of your 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.

Refund of tax for forfeiture of an ESS interest

The previous law may continue to apply to a transitioned right where the right is forfeited or lost after 30 June 2009. The provisions relating to the forfeiture of an ESS interest under the new law will be treated as having been satisfied, if the relevant conditions under the previous law are satisfied.

Calculating the discount for a transitioned ESS interest

The new law applies to calculating the amount of the discount you include in your assessable income for a transitioned ESS interest at the deferred taxing point.

Reporting requirement

The new rules about employer reporting apply to all qualifying shares or rights acquired before 1 July 2009 where no cessation time had occurred before 1 July 2009.

Your employer will not know whether or not you deferred your tax or elected to be taxed at acquisition under the previous law. As a result, your employer must report on shares or rights you acquired before 1 July 2009 where a cessation time may have arisen on or after 1 July 2009, regardless of whether you were in fact taxed when you acquired the shares or rights.

TFN withholding tax rules do not apply to transitioned interests

The requirement for employers to pay TFN withholding tax in situations where you have not quoted your TFN or ABN to them by the end of the financial year does not apply to ESS interests that have been transitioned into the new rules.

Other transitional rules

The new law is also modified in the way in which it applies to:

foreign employment
the acquisition date of some shares or rights for certain CGT purposes, and
certain ESS interests with respect to the meaning of an employment termination payment.

Indeterminate rights

A transitional rule provides that a right acquired before 1 July 2009, which only clearly becomes an ESS interest after 1 July 2009 (an indeterminate right), will be treated as if it were always subject to the previous law.

If under the previous law, tax is deferred on the right beyond 1 July 2009, the right will be treated as a transitioned interest.

What to read and do next

On the Employee share schemes page on our website, there are several documents which will help you understand employee share schemes and what relates to you. These include documents on:

shares and rights acquired before 1 July 2009
lapsed and forfeited ESS interests
record keeping
foreign income exemption for Australian residents and temporary residents
rollover relief
amendment requests.

Last Modified: Monday, 28 June 2010

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