Taxation of share awards varies from country to country and knowing how tax works is essential to ensure you are making the right decisions with your Restricted Stock Units (RSUs), stock awards or employee stock options (ESOs). We will focus on one country at a time and highlight for you the key high level tax considerations you should know for that country. Clearly every individual’s tax situation is different so what we share below is high level guidance for typical scenarios but do your own research or seek specific advice on your situation before taking any action.
The focus today is Australia.
Do employee stock awards have income tax applied at grant date or vesting date?
In Australia income tax is payable at the vesting date for Restricted stock units and restricted stock and on the exercise date for stock options. Income tax is calculated based on the market value (market value less cost for options).
The only exception here is if the stock award has no vesting conditions (no risk of forfeiture), in these cases income tax would be payable upon grant as it is treated as income earned with no risk of it being lost/forfeited in the future.
Are stock awards subject to capital gains tax (CGT)?
Yes, capital gains tax applies upon the sale of the stock. Once vested/exercised the stock is an asset you own and is typically subject to CGT based on the gain made between vesting date and sell date. If held for greater than 12 months after vesting CGT payable is usually discounted by 50% for individuals.
Is income tax withheld by the employer or the responsibility of the employee?
The employer is responsible for reporting the taxable income earned through employee stock awards to the tax authorities but does not withhold tax automatically (except in special circumstances). It is therefore the responsibility of the employee to ensure correct tax is calculated and paid through their year end tax return.
Anything else worth noting about Australia?
If you hold employee stock awards make sure you understand what is taxable if you are moving to Australia and becoming an Australian tax resident. Regardless of how much of the vesting period was spent as a non-resident any shares vesting while you are an Australian tax resident will be subject to income tax in Australia (foreign income tax offset may also be available). CGT will also be payable on any gains made on employee stock awards held when you become a tax resident.
We hope this was useful, please do visit the website and use our free valuation tool if you are thinking about tax and need to understand the current value of your employee stock awards / long term incentives.