By Colin Lewis, Head of Strategic Advice, Fitzpatricks Private Wealth
June 2024

If you received shares that vested under a tax-deferred employee share scheme (ESS) this financial year, you may need to include the value of those shares in your 2024 tax return.

Take Wilma who participated in the Pterodactyl Airlines Employee Share Plan (PAESP).

In 2021, Wilma was granted rights to 1,000 Pterodactyl Airlines (Pterodactyl) shares.

Wilma had to remain employed, and the company needed to meet certain performance conditions for the rights to vest and convert to shares.

Subsequently, the company satisfied its performance hurdles, so Wilma received 1,000 shares in Pterodactyl on 1 August 2023, valued at $10,000 – the market value of a share being $10 at that time.

This is an employee benefit provided by Pterodactyl at no cost to Wilma, for her service, loyalty, and diligence over the two-year period. It’s a non-cash bonus (originally with conditions), so it’s taxable – not tax-free.

Consequently, Wilma’s assessable income this financial year, i.e. 2023-24, needs to include the market value of these shares, so she must include $10,000 in her tax return.

Pterodactyl is required to report ESS information to the Australian Taxation Office (ATO) and Wilma’s 2024 tax return will be pre-filled with this information, so there’s no escaping from declaring this income.

Disposal of shares

Wilma is taken to have acquired her shares on 1 August 2023, with a cost base of $10 a share – the market value at that time.

If Wilma sold her Pterodactyl shares immediately on vesting on 1 August 2023, the outcome would be the same – she needs to include $10,000 as income in her 2024 tax return.

And if she sold her shares within 30 days of vesting, the proceeds would still be treated as income.

Say Wilma sold them on 28 August 2023, when the share price was $11, then $11,000 must be included as assessable income in her tax return – the $1 per share increase in value is not treated as a capital gain, which is important if Wilma wanted to offset a capital loss with this increase.

Where she disposes of her Pterodactyl shares after this 30-day period, any increase in value over $10 a share will be treated as a capital gain and any decrease in value will be a capital loss.

If Wilma makes a capital gain from selling her shares, she’ll be entitled to the 50 per cent CGT discount where she’s held them for 12 months or more – until at least August 2024.

The ATO occasionally issues class rulings explaining the tax treatment of an employer’s employee share scheme – worth reading if you’re an impacted employee.

For example, the ATO issued Class Ruling 2022/73 for the Qantas Airlines Limited – Employee Recovery Retention Plan.

If Wilma does nothing, she’ll pay tax and Medicare levy of $3,450 on her shares – being on a marginal tax rate of 32.5 per cent. So, she needs to make provision for this tax whether that be setting aside money to pay it or not pre-emptively spending the tax refund she thinks she’s otherwise getting.

But if Wilma makes a last-minute personal contribution to her super fund and claims a tax deduction for it, she’ll save tax.

Personal deductible contribution

If Wilma makes a personal deductible contribution of $10,000 – the same amount as the value of the shares she’s received – then she’ll save $1,950 in tax, or 19.5 per cent – the difference between her marginal tax rate (and Medicare levy) and the superannuation tax rate. Not a bad return.

Whilst she loses $1,500 (15 per cent) in contributions tax, resulting in a net contribution of $8,500, Wilma gets a tax deduction of $10,000 saving $3,450 in personal income tax – a net saving of $1,950.

It’s a good year for Wilma to be making a personal deductible contribution because the value of a tax deduction reduces with her tax rate dropping to 30 per cent from 1 July with the commencement of the stage 3 tax cuts.

Three work colleagues, Barney, Betty and Fred also received shares under the PAESP this year.

Barney, whose marginal tax rate is 37 per cent, will save $2,400 in tax and Medicare levy by making a $10,000 personal deductible contribution, and Betty, whose marginal tax rate is 45 per cent, will save $3,200.

However, Fred who also has a marginal tax rate of 45 per cent but has combined income and concessional contributions over $250,000 will only save $1,700 after paying Division 293 tax – the additional 15 per cent tax on contributions over this threshold.

For people in their twenties and thirties, putting money into super and locking it up for decades just to save a bit of tax may be unattractive, especially when there’s bills to pay – a student loan debt, rent or mortgage repayments, costs of raising children and generally dealing with cost-of-living pressures.

But Wilma is saving for her first home.

First home super saver scheme (FHSSS)

If Wilma plays her cards right and contributes to a fund that allows access to super under the FHSSS as not all super funds permit this, then she will only be tying her money up until she needs it to buy a home – forced savings.

Knowing she can get her money out, suddenly the concessionally taxed superannuation environment becomes an attractive place to invest – with a tax rate of 15 per cent on fund earnings and an effective tax rate of 10 per cent on capital gains on assets held for more than 12 months.

Under this scheme, first home buyers who make voluntary contributions of up to $15,000 per financial year can withdraw them plus associated earnings (less tax) to help with a deposit. But it takes years to get the greatest benefit from the scheme as the maximum releasable amount is $50,000.

SMSFs

Fred’s SMSF acquired shares under the PAESP as the ESS rules allowed interests to be acquired by associates of Pterodactyl.

There are complex issues to consider with SMSFs and ESSs to ensure compliance with super law and avoid adverse tax consequences, but the tax liability on vesting still remains with Fred who must account for it in his individual tax return.

Start-up companies and $1,000 tax exempt plans

ESS interests in start-up companies and $1,000 tax exempt plans are treated differently.

The ESS start-up concession allows employees to reduce the taxable discount income relating to their ESS interest to nil.

The taxing point in a $1,000 tax exempt plan arises when shares are sold – CGT applies to the growth in value of shares between acquisition (their market value of $1,000) and sale – and tax is paid on any dividends each year.