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Employee share schemes: 4 steps to stress-free gains

Article By Adam Hurwood | | Business Consulting

Employee share schemes can be excellent ways to be remunerated. They are seen as highly motivational and can incentivise performance.

However, when talking to professionals involved in employee share schemes, they often seem to complain about significant stress. 

This is most commonly due to the uncertainties around tax and the decisions required to manage the shares effectively.

If you’re involved in or about to be involved an employee share scheme, follow these four steps and you should both reduce the stress involved AND maximise the benefits you receive from the scheme:

Step 1: Think of employee shares as a long-term bonus that will be taxed

The majority of employee share schemes do not incur any tax when they are granted, which often generates considerable excitement for employees involved. It inevitably leads to plans for what will be done with all the money.

The bad news is that these shares will be taxed at your marginal tax rate when they vest or become eligible for sale.

This can cause a significant problem as the tax liability won’t be known until you lodge that year’s tax return. It could be over a year after the shares have been sold; the money may already have been spent on holidays, renovations, paying off the mortgage, or investments.

You should therefore factor on losing half the value of your shares before you start thinking about how you spend the money.

Step 2: Sell all of the shares at vesting time

By selling all of the shares at vesting time, you will be able to cover the tax bill that you will soon receive and have some money left over to achieve the goals you’ve identified.

Step 3: Use the remaining sale proceeds to reinvest smartly

With the additional money that you now have available, you can either pay down debt or invest in your spouse’s name inside a trust or even in superannuation.

By doing this, you will build up your assets in a structure that can better protect them and minimise future tax.

If you retained the shares, you would be building up assets in your name, which puts them at risk if you are (or become) a Director. It also ensures that future gains are taxed at your marginal tax rates.

Even if you love your company, you’d be better off selling and reinvesting in a better structure.

Step 4: Diversify to increase your chances of financial success

Now that you have the money in the right investment structure, invest in multiple companies and asset classes to significantly reduce your risk and greatly improve the likelihood of achieving your financial goals.

If you retained your company shares, you’d build up massive risk that this one company will underperform or fail, thereby reducing your wealth significantly.

Your income is already tied to your employer, so don’t tie your whole financial future to them as well!

By following these four steps in managing your employee share scheme, you’ll have a plan in place for dealing with the shares every time you receive them.

These are, however, guiding principles only: all individuals and schemes are different.  Work with your financial adviser and accountant to map out how to achieve your goals and, if you need assistance, contact us here.