An ESS is an arrangement for issuing or transferring shares in a company to past, present and future employees. The arrangement must be connected to the person's employment or service. The ESS definition includes transfers to directors or shareholder-employees in a company, the transfer of shares in a group company and transfers to associates.
ESSs may also be referred to as Restricted Stock Units (RSU), Long Term Investment Plans (LTIP), Long Term Employee Investment Plans (LTEIP), Employee Share Incentive Plan (ESIP), Employee Share Option Plan (ESOP) and Share Performance Units (SPU), this list is not complete.
Exempt ESSs are widely offered schemes that meet certain criteria. The schemes are subject to different taxing rules.
An ESS benefit results in employment income for the employee.
The time when the income is taxable is the “share scheme taxing date” which is the earlier of when:
- the benefits are transferred to a non-associated person
- the benefits are cancelled, or
- the employee share scheme beneficiary effectively owns the shares in the same way as any other shareholder (and there is no material risk that the ownership or value will change).
The amount of employment income is broadly equal to the value of the shares on the share scheme taxing date (or, if rights or shares are transferred to a non-associated person or cancelled, the amount received for the transfer or cancellation), less any amount paid for the rights or shares.
An employer may elect to deduct tax from ESS benefits. If the employer does not do this, the employee will have to pay any tax.
An employer can claim a deduction if they're providing ESS benefits. This deduction generally matches the income to employees in timing and quantity. No other deductions are allowed for providing an ESS benefit, except for costs incurred in establishing or, managing a share scheme such as interest costs, or certain costs on other employment income like bonuses.
Employers are required to provide employment information when they provide ESS benefits to employees.
To find out more about what an ESS is and how it is taxed read the Tax Information Bulletin Volume 30 Number 5 June 2018 pages 52-70.
You may want to speak with your tax professional.