A high price to pay for a piece of the action

COMPANIES that go public and want to give their employees a slice of the action at discount prices can find they have left their workers with an unpleasant tax surprise.

Under tax law, that discount will be treated as income and the employee will be taxed on it, whether he or she has sold the shares or not.

The section of the tax code governing employee share schemes is very complex and has been described as a “patchwork quilt” by tax practitioners.

Affected employees could claim the company’s prospectus was misleading and deceptive, leaving companies with the basis for negligence actions against their accounting firms or advisers.

Minter Ellison partner Sebastian Hempel said companies needed to structure the share offer so the discount was tax exempt or the tax was deferred until the employee sold the shares.

“Alternatively they can offer affected employees cash compensation to cover their increased tax bills,” he said.

“We are seeing an increasing number of cases where companies think they are doing the right thing by their employees and are later accused of handing over hidden and unexpected tax liabilities.

“Often employees are not being warned in the offer document that the discount may be taxed, and when it is taxed they are surprised and often angry.”

Mr Hempel said these tax liabilities often went undeclared and eventually could be discovered by the Australian Tax Office.

Institute of Chartered Accountants in Australia tax spokesman Roger Sullivan said companies often were better off to give employees free options.

“This option offer can be structured so the employee only gets taxed when he or she sells the shares. They don’t mind being taxed then because they have the cash in their hand from the share sale,” he said.

“The fundamental problem with staff share schemes is employees get hit with the tax when they don’t have the cash in their hands.”

Mr Sullivan said companies would be better off to issue shares and lend their staff the money to buy them.

“This is actually allowed under the Corporations Law,” he said.

“But either way these share schemes are a lot of administrative work.”

Add your comment

BNIQ sponsored byECU School of Business and Law


6th-Australian Institute of Management WA20,000
7th-Murdoch University16,584
8th-South Regional TAFE10,549
9th-Central Regional TAFE10,000
10th-The University of Notre Dame Australia6,708
47 tertiary education & training providers ranked by total number of students in WA

Number of Employees

BNiQ Disclaimer