Executive Share Schemes are complex. And this is especially true when an employee has unvested performance shares as part of their employer’s executive share scheme is made redundant or is considering taking voluntary redundancy.
When leaving employment in this manner, most employees comply with the ESS plan and company rules to be considered a ‘good leaver’. Here we examine THREE common complexities affecting your ESS in redundancy circumstances.
Generally, unvested executive share scheme awards are reduced by the pro-rata number of service days that have not been served with the company during the period from grant to vest. For example, if you served half of your vesting period and you were deemed a good leaver, you would likely receive 50% of your award at vesting.
These pro-rata awards usually vest on the cessation of your employment. At that point, the value of your awards is reported through your Australian tax return as income.
Complexity #1 – Foreign Service
In redundancy circumstances, the treatment of your awards can be further complicated by a period of foreign service that may have occurred at some point between when your award was granted and when it vests (or is exercised). Depending on how you were treated while you were abroad (and whether you were outbound from or inbound to Australia) you may be subject to:
- A pro-rata tax treatment of the award in Australia that reflects your Australian service and a pro-rata tax treatment of the award in a foreign tax jurisdiction that depends on your foreign service period(s); or
- The full value of the award taxed in Australia with a credit applied for the foreign tax payable on the award vesting (or being exercised).
Complexity #2 – Performance Tests
An additional complication relates to a performance type award which, in addition to having a time-based vesting period, also has performance tests.
If you have an award of this type, you need to consider the tax implications of those future performance test periods as well as any pro-rata effect on the number of shares or rights applicable.
Complexity #3 – Multiple Tax Return Amendments
As each tranche of performance tested awards vest, taxable income is created and of course, this creates income which is assessable.
Cessation of your employment is generally the date at which your awards are taxable. This means you may need to amend your Australian tax returns to record that income from each performance test date.
For example, if you have an award with a performance test date in 12, 24 and 36 months’ time, there is the likely requirement for amending your current year’s tax return when your 24-month and 36-month performance test conditions are met and your assessable amount (for Australian income tax purposes) is known.
Without a complete understanding of your current and future ESS situation, you could be at risk of unexpected tax outcomes. These can include not meeting your tax obligations, paying more tax than necessary or missing out on your full ESS entitlement, which is often the case, if you are not aware of how performance tested awards create taxable income.
Next steps…
Most mining executives find ESS matters time consuming and difficult to manage. Unfortunately, failing to meet your obligations often results in having to invest even more time, endure the frustration of dealing with both Australian and international tax authorities and perhaps of greatest importance, being under-informed when making decisions.
It’s complex. And this is precisely why we have formed a panel of professionals comprising ESS specialist consultants and management administrators, financial advisers, legal advisors and tax specialists with ATO and foreign tax experience. Our collaborative approach provides coordinated, high level advice and decision-making support that strives to achieve the best possible outcomes for mining and resources personnel.
To discuss your circumstances, please contact James Marshall, Financial Adviser and ESS Specialist at Resources Unearthed on +61 7 3007 2000.
Recommended reading:
James Marshall, Professional Profile
ESS: What you need to know about Executive Share Schemes
Resources Unearthed is a solutions hub that provides integrated financial, legal 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 Ltd ABN 54 139 889 535 AFSL 357306. This is general advice only and does not take into account your objectives, financial situation or needs, so you should consider whether the advice is relevant to your personal circumstances. You should also read the relevant Product Disclosure Statements (PDS) before making any financial decisions.
