At the end of the financial year in which Executive Share Scheme (ESS) shares have vested, participants may have a tax liability that needs to be paid. To avoid a cashflow crisis, you need to start planning your ESS tax strategy well ahead of June 30.
Unfortunately, many mining and resources ESS participants underestimate the significant amount of cash they need to have on hand to meet their tax obligation. To find out important information that can help you to avoid paying more tax than necessary and better manage your ESS, please read on.
Shares awarded under an ESS have a taxing point at the time of vesting. Whether you retain the shares or you sell them, the vesting of your employee shares results in assessable income.
Come tax time, you’ll need to pay the tax on that income. If you haven’t planned, the amount you may be required to pay may come as a shock.
Having the money put aside is important. Without it, you might find yourself in a financially tricky situation.
For example, if you retained your shares on vesting, and the share price falls, your share value may be insufficient to cover your tax obligation, and that would leave you scrambling to pay it.
These last-minute cash alternatives often include considerable and extremely inconvenient cashflow impacts, drawing on your savings or being forced to sell an asset. The latter would not likely be an immediate transaction, meaning your ATO liability might increase to include a penalty as well.
The problem with tax affecting ESS is it’s complicated and that creates a time burden.
It also involves a massive paper trail that must be wrangled into organised records that are acceptable to the ATO.
The key to being organised tax-wise, but also financially organised to avoid impacts on other aspects of your personal wealth, is to retain ALL documentation relating to your established cost base of vested shares.
We understand, this is not easy for busy executives who must first devote time to getting a thorough grip on the extent of their ESS tax compliance, and then proactively attend to those requirements while remaining abreast of vesting timing.
In my experience, a disciplined approach to managing your ESS is imperative.
After all, for many mining and resources executives, their ESS can represent the majority of their wealth producing assets. Indeed, from a balanced financial planning perspective, ESS participants are often in a ‘top heavy’ investment portfolio position due to mostly holding their employer’s shares. (But that’s another story…if you’d like to learn more about the risks, click this link.)
As a qualified financial planner and ESS strategist, here are my top three insights for planning ahead of the end of financial year so your tax liability may be proactively managed, rather than having a fraught reactive approach that can deny you much deserved personal wealth benefits.
1: Time
For our clients, the nature of their profession means they simply don’t have the time to commit to understanding the full extent of ESS compliance and then properly attend to meeting those requirements. Ironically, understanding you won’t have the time to properly manage your ESS is the first step to properly managing your ESS!
2: Systems
In my experience, the majority of ESS participants do not have adequate systems for capturing and managing their ESS documentation. Even though it’s an ATO requirement for records to be kept for every transaction, event or circumstance that may be relevant to establishing whether the ESS has made a capital gain or loss.
3: Expense
It’s cause and effect. Not having the time to fully understand obligations and implement action ultimately results in extra expenses. These commonly include paying more tax than necessary, and sometimes penalties as well. Inadequate documentation usually leads to a costly and time-consuming process of re-establishing historical cost bases which are essential for understanding capital gains tax implications.
On that last point, we have stepped in on many occasions and re-established the paper trail for our clients, which on each occasion has proved to be a necessary and valuable investment.
We usually continue to guide the ESS compliance process thereafter, as the benefits include easing what has been a significant time burden and an efficient management service that’s conducted in collaboration with their accountant.
For our clients, this usually means they pay no more tax than necessary, and for the tax they do need to pay, they have a financial plan that allows them to meet the obligation without significant disruption to their cashflow or lifestyle while the extra financial often creates better, overall wealth outcomes.
Next Steps
As I mentioned at the beginning, planning well in advance of June 30 is the key. It can take time to get your affairs in order. Waiting until the end of financial year is upon you will be too late for implementing measures needed for saving tax or having ready cash available to meet your liability.
May I invite you to contact me, in the first instance for a discussion about your ESS circumstances and then to identify the type of support you need.
In my experience, clients who have access to, and take up specialist and strategic ESS advice are better able to understand their options. As noted here, planning done sooner rather than later is the key to avoiding paying more tax than necessary and taking advantage of the considerable personal wealth benefits ESS can bring.
To find out more about ESS strategic management and planning, please contact James Marshall on +61 (0) 7 3007 2000 or email contact@resourcesunearthed.com.au
Resources Unearthed is a solutions hub that provides integrated financial, legal, property, accounting and business advisory services for executives, professionals and business owners in the mining and resources sectors.
Stratus Financial Group and its advisers are Authorised Representatives of Fortnum Private Wealth ABN 54 139 889 535 AFSL 357306. This advice is general and does not take into account your objectives, financial situation or needs. You should not act on it without first obtaining professional financial advice specific to your circumstances.
*Please note: For advice and services relating to this matter that are not offered under the Fortnum Private Wealth AFSL, in accordance with our collaborative advice model, when required, such matters are referred to appropriately qualified professionals.
