• ESS – Benefits provided to non-employees

    This fact sheet explains when shares, stapled securities or rights to acquire them, provided to individuals or their associates who are not employees, will be treated as employee share scheme interests (ESS interests) acquired under an employee share scheme. The information contained in this document applies to ESS interests acquired on or after 1 July 2009.

    The value of ESS interests are assessed to an individual employee at acquisition or, in some circumstances, at a later time. This tax treatment can also apply to non-employees and in particular:

    ESS interests provided to associates

    If an individual fits any of the types of non-employees described in this fact sheet, the employee share scheme rules will still apply to the individual – even if shares, stapled securities or similar rights are not provided to them personally, but instead are provided to their associate.

    An associate of an individual is broadly defined and includes:

    • relatives
    • if the individual is in a partnership – the partnership, the other partners and their spouses and children
    • the trustee of a trust under which they or an associate benefit
    • a company under their control or control by an associate.

    Independent contractors

    An individual who provides services to another entity under a contract or an agreement and who is partly or fully rewarded for those services with shares, stapled securities or rights to acquire them from that entity, is assessable on the value of those benefits as ESS interests.

    An individual provides services to another entity if it is due to a direct arrangement between them. If carrying on a business, such an individual is sometimes called a sole trader.

    Example 1 – Shares provided to an independent contractor under an employee share scheme

    Martin is a geologist who provides freelance consultancy services to various mining companies. He operates as a sole trader and is not an employee under the ordinary meaning of the word. One of his clients, a listed public company, pays for his services with a combination of $40,000 and the issue of 20,000 shares.

    The employee share scheme rules apply to Martin even if he is not considered to be an employee for any other purpose. He will be assessable on the value of those shares, in accordance with the employee share scheme tax rules.

    Example 2 – Shares provided to an associate of an independent contractor

    As in example 1 above, Martin provides consultancy services to a publicly listed company. However, instead of personally receiving the shares, Martin nominates his family trust as the recipient of the shares.

    Martin is still assessable on the value of those shares, in accordance with the employee share scheme tax rules.

    End of example

    Company directors

    A company director who receives shares, stapled securities or rights to acquire them from a company, in connection with their role as a director of that company, is assessable on the value of these benefits as ESS interests. This is the case regardless of whether they receive any other remuneration for their services as a director.

    Example 3 – Options provided to a company director

    Rachel is appointed to the board of a biotechnology company. Along with other directors and key executives, she is issued options as part of an incentive program designed to reward recipients if the company is successful. She does not receive any other remuneration as a director.

    The employee share scheme rules apply to Rachel. She will be assessable on the value of those options, in accordance with the employee share scheme tax rules.

    Example 4 – Options provided to an associate of a company director

    As in example 4 above, Rachel is appointed to the board of a biotechnology company. The company issues options as part of an incentive program designed to reward recipients if the company is successful. At Rachel's request, the company issues the relevant options to her spouse.

    The employee share scheme rules apply to Rachel. She will be assessable on the value of the options, in accordance with the employee share scheme tax rules.

    End of example

    Labour hire arrangements

    Individuals working under labour hire arrangements who receive shares, stapled securities or rights to acquire them from the labour hire firm, in connection with work arranged by the firm, are assessable on the value of those benefits as ESS interests.

    Example 5 – Shares provided in connection to a labour hire arrangement

    IT Provider Ltd keeps a database of skilled persons who are available for their services to be provided to third parties. IT Provider Ltd contracts with a major bank to provide programming services and arranges for Richard, a computer programmer, to perform some of the work. IT Provider Ltd pays Richard for his work. In addition, to reward past work and encourage Richard's loyalty for the future, IT Provider Ltd issues to him $2,000 worth of shares in the company.

    The employee share scheme rules apply to Richard. He will be assessable on the value of the shares, in accordance with the employee share scheme tax rules.

    End of example

    Other personal services income

    Some consultants or contractors operate through a company, partnership or trust. A special tax regime may apply to personal services income earned by these entities.

    See also:

    If the personal services income rules apply to assess the income of a company, partnership or trust back to an individual who performed the services, then the employee share scheme rules do not apply to that individual.

    Example 6 – No personal services business

    Genevieve works as a civil engineer in the construction industry. She operates through her associated company, Gengine Pty Ltd.

    Gengine contracts with Big Gas Ltd to provide services on a large project throughout the 2010–11 year. The work is performed by Genevieve and, as a result of the tax rules on personal services income, Genevieve is assessed on income derived under the contract.

    Big Gas Ltd operates an employee share scheme. It issues shares to its employees and to some key contractors, including Gengine Pty Ltd.

    The employee share scheme rules will not apply to Genevieve in relation to the shares acquired by Gengine Pty Ltd. However, the value of the shares may be assessable to Genevieve through the operation of other taxing provisions.

    End of example
      Last modified: 07 Feb 2017QC 23916