Having your role made redundant can be a stressful experience, with many uncertainties about what the future holds. For executives in the mining and resources sector, this period may present an opportunity to take a break, transition into consulting, or find new employment. Regardless of your future career path, understanding how your Executive Share Scheme (ESS) is affected by redundancy is critical. Knowing your options and the tax implications can help you make informed decisions to secure your financial future.
Good Leaver Provisions: Favourable Vesting Outcomes
Redundancy often falls under “good leaver” provisions in most ESS plans, leading to favourable outcomes for executives. Typically, unvested shares are pro-rated based on your tenure, allowing you to receive a proportionate number of shares. In some cases, matching schemes where you’ve contributed via payroll can result in full vesting of your shares. It’s important to review the specific rules of your plan to fully understand what redundancy means for your unvested shares.
Each ESS is different, and not all plans will treat redundancy the same way. Therefore, carefully reviewing your documentation and working closely with your share scheme administrator is vital. If the redundancy of your role means you’re considering transitioning from an executive role into a consulting, you can explore more by reading this article.
Working with Your Share Scheme Administrator: Acting Quickly
When redundancy occurs, time is of the essence when it comes to safeguarding the information regarding your share scheme. Access to your share scheme administrator’s platform may soon be terminated, making it crucial to act swiftly. Downloading all relevant documentation and transaction histories before losing access is imperative. These records are essential for understanding tax obligations both in the year of your redundancy and into the future when you sell shares, not to mention the ATO requirement to hold records for at least 7 years.
Tax Implications of Redundancy
Generally, redundancy triggers the taxing point for ESS, where the value of shares at redundancy reflects the amount you’re required to declare in your tax return for that financial year. As each share scheme is different, it’s important to receive advice at the time of redundancy, so you understand what your tax obligations are, and when they will be payable.
However, since legislative changes in July 2022, the taxing point for performance-based awards is when the shares vest, rather than the date of your redundancy, therefore simplifying your tax obligations. This means your tax position is tied to when shares are physically vested and transactable, helping avoid cash flow issues related to taxation on shares that cannot yet be sold.
What to Do with Shares Vesting from Redundancy
Once shares are vested, you need to decide on your next steps. Several options are available:
- Retain Shares: Holding onto your shares may be beneficial, especially if you can hold them in a tax-effective structure. This could involve transferring shares to a lower-income spouse, contributing to superannuation, or using a family trust to lower the overall tax burden. If your shares have only recently been vested, you may face minimal capital gains tax (CGT), making it an optimal time to explore these options.
- Sell Shares: Alternatively, selling your shares could allow you to repay debt, reinvest, or contribute to superannuation. A staggered sale may help you realise value over time, avoiding the risk of waiting for a market “high” and instead giving you flexibility. For a deeper dive into ESS and vesting strategies, read our practical guide to ESS and vesting for mining and resources professionals.
It’s important to note that regardless of which options you elect, tax is more than likely payable as a result of your redundancy.
Take Control of Your ESS Post-Redundancy
When redundancy occurs, understanding the impact on your ESS is essential to avoid missed opportunities or unnecessary tax liabilities. Take swift action to gather all necessary documentation from your share scheme administrator, review the tax implications, and consider your options for managing vested shares. By doing so, you can turn this uncertain time into a period of financial clarity before you make your next move.
Next Steps
Understanding the complexities of Employee Share Schemes and share vesting is crucial for mining and resources executives and business owners. By considering your options at the point of vesting, managing emotional attachments, and seeking specialised advice, you can navigate these financial strategies effectively and create more rewards for your success!
For more information, please contact James Marshall for a 20-minute, no-obligation discussion. You can call James at +61 (0) 7 3007 2000 or email contact@resourcesunearthed.com.au.
To learn more about James, visit this link.
Resources Unearthed is a solutions hub that connects senior executives, established professionals, and business owners in mining and resources with proven specialist advisers.
