Equity-based incentives are becoming more common in Australia, especially in tech, finance and growing companies that want to reward loyalty or performance. Employer shares can be a fantastic way to build wealth, but only if you understand what you’re signing up for.
Before you agree to anything, it’s worth taking the time to get your head around how these schemes work. The tax implications can be significant, and the value of your shares can go up or down depending on how the company performs. Here we unpack the five most common types of employee share schemes, how they’re taxed, and what to keep in mind.
Employee share purchase plans (ESPP)
With an ESPP, you’re offered the chance to buy shares in your employer, often at a discount or through salary sacrifice. You usually become the legal owner of those shares straight away, which means you may receive dividends and voting rights from day one. The catch is that the discount you receive is generally treated as taxable income in the year you acquire the shares, unless you qualify for a $1,000 tax concession. When you eventually sell the shares, you’ll also need to pay capital gains tax on any profit above the market value of the shares on the day you acquired them.
Restricted share plans (RSP)
Restricted share plans are a little different. You still receive real shares upfront, but there are restrictions on when you can sell them. These restrictions might last for a certain number of years or until you meet a specific condition, like staying with the company or hitting a performance target. Because there’s a chance you might lose the shares (for example, if you leave the company), the ATO allows you to defer paying tax on the discount until those restrictions end, or for up to 15 years (seven years for grants made before 1 July 2015). You usually still receive dividends and voting rights during this period.
Employee share options (ESOP)
Options give you the right but not the obligation to buy shares in the future at a set price called the exercise price. You don’t own the shares when you’re granted the options, but if the company’s share price rises above the exercise price, you can exercise the option and potentially make a profit. Tax typically kicks in when you exercise the options, based on the market value of the shares at that time minus the exercise price. If you hold the shares and sell them later for more, you’ll pay capital gains tax on the additional profit.
Restricted stock units (RSUs)
RSUs are a promise by your employer to give you shares in the future, provided you meet certain conditions, usually staying employed for a set period or reaching a milestone. You don’t have to pay anything upfront. When the shares are delivered to you (called vesting), the market value at that time is taxed as regular income. If you hold onto the shares after they vest and sell them later, any further gain or loss is dealt with under capital gains tax rules.
Performance rights
These are similar to RSUs, but instead of just staying with the company, you need to hit a performance target before the shares vest. That might be something like reaching a sales goal or a certain return for shareholders. Once the rights vest and you receive the shares, you’re taxed on their value as income. If you decide to hold them and sell later, any further profit is taxed under the capital gains rules.
Should you keep or sell your employer shares?
One of the most powerful questions I ask clients is this: if your employer gave you $50,000 in cash instead of $50,000 worth of shares, would you actually go and buy shares in your own company?
If the honest answer is no, that could be a strong clue that it’s worth thinking about diversification once your shares vest.
Another good question is whether you would invest that money in your own name. That matters, because employer shares generally end up in your personal name. If you’re on the top marginal tax rate, selling those shares later could mean handing over a significant portion to the tax office.
It’s also important to remember that tax is often payable whether you sell the shares or not. In many schemes, there is a 30 day window after vesting during which selling moves the taxing point to the sale date, so any extra capital gain or loss is usually small, though capital gains tax can still apply. That can be a useful opportunity to sell, reinvest elsewhere, or move the proceeds into a different structure as part of your broader wealth strategy.
That said, these decisions often come with trade-offs. Selling shares might affect future vesting, involve brokerage costs, or create other tax consequences. Transferring funds into another name or structure might trigger tax or have implications for your long-term financial plan. For these reasons, it’s always worth speaking with a qualified financial planner or tax adviser before taking action.
Our take: Making the most of your employer share plan
Employer shares can be a fantastic way to build wealth, but only if you understand what you’re getting into. To make the most of your employee share scheme, make sure you know what type of plan you’re in, when you actually become the legal owner of the shares, how and when tax applies, what happens if you leave the company, and whether or not it makes sense to hold onto the shares or diversify over time.
Most importantly, don’t just assume that what you’ve been offered is automatically the best option for your situation. Take a step back, consider the big picture, and seek personalised advice. It could make a real difference to your long-term financial wellbeing.
Frequently asked questions
What’s the difference between RSUs and options?
RSUs are delivered to you automatically when they vest, and you’re taxed on their value as income at that point. Options give you the right to buy shares later, and you’re taxed when you exercise that right.
Do I have to pay tax on my employer shares even if I don’t sell?
Yes. In many cases, tax is triggered when shares vest or options are exercised, even if you don’t sell them. That’s why it’s important to plan ahead for any tax payable.
Can I transfer my employer shares into my partner’s name or a trust?
Sometimes, but there can be tax consequences. Transferring shares after they vest might trigger capital gains tax. It’s best to get professional advice before making any changes.
What happens to my employer shares or options if I leave the company?
It depends on the scheme. You might lose unvested shares or options, and sometimes you only have a limited time to exercise options after leaving. Always check the fine print.
Is it risky to hold too many employer shares?
Yes. Relying too heavily on one company, especially for both your income and investments, increases your financial risk. Diversifying is often a safer long-term approach.
Parker is passionate about helping clients kick their financial goals and live a great life. Read his full bio here.
