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ESOPs for Employees: Managing Tax and Executing Strategies

ESOPs for Employees: Managing Tax and Executing Strategies

By Prime Advisory, 20 May 2024

Are you in line for an Employee Share Option Plan? Or is your company likely to go IPO in the near future? Then, this article makes for essential reading.


Vesting. Exercising. Holding. Selling. 

The world of Employee Share Option Plans (ESOPs) is a mightily complex one—even once you get past all the acronyms and buzzwords. 

But it’s a realm that’s only increasing in popularity, and with good reason.

In simple terms, ESOPs give employees a tangible stake in the organisation they work for—notably share options—which increases their motivation and output, thereby aiding businesses to enhance overall productivity and efficiency. 

Everyone wins. Well, at least in theory they do. 

You see, there’s another interested party in this arrangement: The Australian Taxation Office (ATO). 

And its presence can spell trouble, at least for the unprepared.

“With ESOPs, it is absolutely vital to plan accordingly—otherwise you can create savage tax bills for yourself,” PrimeAdvisory Director and Employee Share Scheme Specialist, Angus Rodgers, warned.

The Golden Rule of ESOPs

The most important factor to keep in mind with ESOPs is that they are not a one-size-fits-all benefit plan. They can vary wildly from company to company. 

What’s more, navigating ESOPs is like negotiating a labyrinth—there are ample paths you can take. 

So, it’s vital to consider your individual circumstances and goals—now and into the future—to maximise a plan’s positives.

“Prior to vesting or exercising, your options are very limited. However, once exercise or vesting happens, you have flexibility, and we can start to implement some exciting strategies,” Rodgers said.

As part of this, having a clear understanding of tax structures is critical. 

And, typically, there’s no time to waste. In fact, ill-preparation can have serious consequences.

“If you’re looking to build wealth for the next 10, 20, or 30 years, making sure that you have the right structures set up is very important,“ Rodgers said.

“But it’s absolutely vital to understand your obligations from the get-go. Because, let’s say the share price of your company drops by more than 50% from vesting day… you can actually lose money.

We saw it in the ‘tech correction’ a couple of years ago. Some household names like Zoom and Shopify lost more than 50% of their value. This creates tax bills for these employees, and in most cases they have no money to pay for it.” 

Executing Strategies

It means that a proactive approach is essential, but there’s plenty to consider.

“With tax management strategies, the questions you want to be asking yourself are, what are you going to do at vesting? What are you going to exercise? When can you sell? When should you sell?” Rodgers said.

“And then, can I transfer the stock to another entity – such as a family trust, a self-managed super fund, or maybe a family member with a lower tax bracket.

“With this move, there’s the potential benefit of reducing future tax.”

The ESS specialist declared that using superannuation as a tax-saving strategy was underutilised.

“Not only is super an excellent vehicle for tax savings, but there’s this wonderful thing called ‘catch-up contributions’,” Rodgers said. 

“With this, you’re actually allowed to ‘look back’ up to five years, depending on your superannuation balance, and top up your super for the years that you haven’t completely optimised it, so you can claim a tax deduction.

“It’s just another avenue among many that is worth exploring.”

However, Rodgers stressed the importance of tailoring ESOPs to the distinct position of the individual.

“Option plans should be regarded in a positive light. They’re an incentive or reward, so they should be viewed with excitement, not stress,” he said.

“It all comes back to accounting for an individual’s unique situation, their goals, their level of risk aversion, and the choices they feel comfortable making.

“That’s when the biggest wins eventuate.”

ESOPs for Employees—Expert Guidance

We’ve established that ESOPs are complex, so it pays to have expert advisors on your side. 

That’s where Angus comes in. 

His knowledge of the ESOP landscape is profound, and with his guidance you’re in the best hands to maximise the benefits that your plan offers.

Keen to learn more? 

Reach out to Angus at [email protected] to start the conversation.

Let’s see what’s possible.


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