Accounting & Taxation Update | Australia
When preparing individual income tax returns, both taxpayers and tax agents often rely heavily on the ATO's pre-filling report for Employee Share Scheme (ESS) income. While this is a useful starting point, it can lead to an important omission: the capital gains tax (CGT) consequences when ESS shares are subsequently sold.
An employer or share plan administrator may report the ESS discount or deferred taxing point amount to the ATO. However, the pre-filling report should not be assumed to contain a complete calculation of the capital gain or capital loss arising from a later disposal of those shares.
This issue commonly arises with tax-exempt share purchase plans, deferred share plans, restricted stock units (RSUs) and performance rights.
A proper review should therefore consider two separate tax events:
The objective is to ensure that the ESS benefit is not taxed twice, while any subsequent capital gain or loss is correctly recognised.
The tax treatment depends on the legal nature of the interest received, the terms of the scheme and whether the ESS discount is taxed upfront or deferred.
| Scheme category | ESS income tax treatment | CGT treatment on subsequent sale |
|---|---|---|
| Taxed-Upfront Schemes | The ESS discount is generally assessable in the year the shares or rights are acquired. Eligible employees may qualify for the up to $1,000 reduction, subject to statutory conditions. | The cost base is generally the market value at acquisition. A subsequent sale may result in a capital gain or loss. |
| Taxed-Deferred Schemes | The ESS discount is generally assessable at the deferred taxing point, subject to the applicable statutory rules. For shares, this is generally when forfeiture risk and relevant disposal restrictions have ended, or at the 15-year maximum. Special rules apply to rights and disposals within 30 days. | The cost base is generally the market value at the deferred taxing point. A subsequent sale may result in a capital gain or loss. |
| Start-Up Concession Schemes | Eligible ESS interests may qualify for concessional treatment under Subdivision 83A-B, meaning the discount is generally not included in assessable income under the ordinary ESS discount rules. Strict eligibility requirements apply. | A subsequent sale is generally subject to CGT. The cost-base treatment depends on whether the interest is a share or a right, so the specific arrangement should be checked. |
Note: The terms “deferred share plan” and “RSU” are commercial descriptions, not separate tax categories in Division 83A. The plan documents must be examined to determine the applicable provisions. Section 83A-30 also has an exception for certain rights covered by the start-up concession.
Assume an employee receives 1,000 nil-cost rights under a qualifying deferred ESS arrangement.
At the ESS deferred taxing point:
The employee subsequently sells all 1,000 shares for $13 per share.
| Calculation | Amount |
|---|---|
| Sale proceeds | $13,000 |
| Illustrative CGT cost base | $10,000 |
| Capital gain before selling costs | $3,000 |
The $10,000 ESS amount is employment-related assessable income. The additional $3,000 is a capital gain.
For qualifying deferred ESS interests, the 30-day rule may alter the deferred taxing point if the relevant interest or shares are disposed of within 30 days of the otherwise applicable taxing point. The treatment depends on whether the ESS interest is a share or a right, so the relevant provision must be checked before applying this example.
Assume an employee acquires 1,000 shares under a qualifying tax-exempt share plan.
For illustration:
The employee's assessable ESS discount is $3,000, assuming all conditions for the reduction are satisfied.
The employee subsequently sells all 1,000 shares for $13 per share. The combined ESS income and CGT calculations are shown below.
| Item | Amount |
|---|---|
| Market value at acquisition | $10,000 |
| Employee purchase price | $6,000 |
| ESS discount | $4,000 |
| Less: eligible ESS reduction | ($1,000) |
| ESS income | $3,000 |
| CGT cost base | $10,000 |
| Sale proceeds | $13,000 |
| Capital gain before selling costs | $3,000 |
The cost base is not automatically reduced by the $1,000 ESS reduction. Section 83A-30 generally treats the ESS interest as acquired for its market value for purposes outside Division 83A, subject to its statutory exception and the specific circumstances of the arrangement.
The employee therefore reports the ESS amount and the subsequent CGT outcome separately, avoiding both omission of the disposal and double taxation of the same economic benefit.
This example assumes that the shares are acquired directly under an upfront-taxed share plan and that no special rule changes the cost base. A rights-based plan or a different legal arrangement may produce a different result.
The ATO pre-filling report is a useful cross-check, but it should not be treated as a complete CGT calculation.
The tax agent should obtain and reconcile the following records:
Employer ESS statement
Confirms the ESS arrangement, discount or deferred taxing point amount and other reported ESS information.
Share plan administrator statement
May provide the allocation or acquisition date, number of shares, market value used for ESS reporting, and vesting or release details.
Broker transaction statement
Confirms the disposal date, number of shares sold, sale price, brokerage and net proceeds.
ATO pre-filling report
Provides a cross-check against information reported to the ATO, but does not necessarily establish the correct cost base or calculate the final capital gain or loss.
Where shares were acquired in several tranches, the records should be reconciled by parcel so that the correct acquisition dates, cost bases and disposal proceeds are matched.
Before finalising a return involving ESS interests, tax agents should:
The key message for taxpayers and tax agents is straightforward: ESS pre-filling does not remove the need to review subsequent share disposals.
A complete tax return review should reconcile the employer's ESS reporting with the share plan administrator's records and the broker's disposal information. This helps ensure that ESS income is correctly reported, subsequent capital gains and losses are not overlooked, and the CGT cost base is determined under the applicable statutory rules.