Employee Profit Sharing Arrangements, Employee Share Schemes and Tax Consequences

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Providing greater incentives to staff in a company may come with hidden consequences for both the company and the employee.

As a company grows, staff may be offered incentives such as shares in a company as well as profit sharing. Payments of shares and profits may be made directly to an employee or into a Trust set up specifically for that purpose.

When entering into these arrangements, employers may or may not enter into written agreements with their staff as to how the shares and profits in a company will be distributed to the employee.
A distribution of company shares or profits in this way is likely to be viewed by the Australian Taxation Office as an employee share scheme, depending on the nature of the agreement. The Australian Taxation Office has specific requirements for this.

For employees, some of the consequences of this arrangement may include the following:

  • The employee may be taxed when they receive the shares or profits in the company, when they leave the company, or when various triggering events occur.
  • The tax payments could be significant and occur at a time which is not suitable for the employee.
  • The scheme may still be viewed as an employee share scheme even if the shares are held by a Trust.
  • Payments of income out of the trust to various beneficiaries may have further consequences for the employee in relation to their individual tax payments.
  • There will be compliance and administration costs associated with the running of the Trust.
  • The agreements may or may not cover who pays the tax and when it is to be paid.
  • Tax implications when the shares in the company are subsequently sold by the employee.

Employers wishing to enter into such transactions would need to be mindful of the following consequences:

  • Fringe Benefits Tax implications.
  • Issues surrounding how the company is to be valued, the proportion of profits to be paid and when they are to be paid.
  • The employees may have voting or other rights in the company which the employer may not have intended.

With the numerous tax and other consequences of providing employees with a share of the company and company profits, employers and employees need to very carefully consider their agreement and the consequences that follow. Alternate, simple arrangements may also need to be considered. Expert legal and accounting advice should also obtained.

If you have any questions regarding the above, or questions generally regarding employment agreements and taxation, please do not hesitate to contact me.