June 7, 2024

A Practical Guide to ESS and Vesting for Mining & Resources

Navigating Employee Share Schemes (ESS) and share vesting can be intricate and pivotal for senior executives and business owners in the mining and resources sectors. These schemes offer significant financial incentives but also come with substantial tax implications that must be carefully managed.

For leaders in this highly competitive industry, understanding the nuances of ESS and the vesting process is crucial to retaining top talent and ensuring long-term financial stability. With the right approach, ESS can not only enhance personal wealth but also align employees’ interests with the growth and success of the business.

However, without proper planning and advice, the tax liabilities can become overwhelming, detracting from the potential benefits. If you’re new to ESS or need a refresher on the importance of vesting, this article is for you.

Understanding ESS Vesting

Employee Share Schemes (ESS) are programs designed to grant company shares to employees as part of their remuneration package. These schemes serve as powerful tools for aligning the interests of employees with the long-term goals of the business, fostering a sense of ownership and commitment. Vesting, a key component of ESS, refers to the process by which employees earn the right to own the shares granted to them. This typically occurs after a specified period or upon achieving certain performance milestones.

Vesting is a critical point for executives and business owners in the mining and resources sectors because it marks the first opportunity to transact the awarded shares. At this stage, the shares become the property of the employee, who can then decide to hold or sell them. The financial benefits of vesting can be substantial, offering significant potential for wealth accumulation through capital gains and dividends.

However, along with these benefits come potential tax liabilities. In Australia, the point of vesting is often considered the taxing point, which can create an unfunded tax liability. This means that while the executive gains ownership of the shares, they may owe taxes on their value, even if they choose not to sell them immediately. The complexity arises from the gap between the vesting date and the tax payment deadline, which can sometimes span nearly two years. This delay can lead to unexpected tax obligations if not carefully planned for.

Key Considerations at the Point of Vesting

Option 1: Retaining Vested Shares

Retaining vested shares can offer long-term financial benefits through dividends and capital gains. However, the tax implications vary depending on how the shares are held. For example, holding shares in your personal name, your spouse’s name, a superannuation fund, or a family trust can lead to different tax outcomes. It’s crucial to plan for the future tax on dividends and capital gains, and to consider the risk that your tax liability might exceed the value of the shares if their price falls unexpectedly.

Option 2: Selling All Vested Shares

Selling all vested shares immediately can be beneficial if you plan to use the proceeds for repaying debt, contributing to superannuation, or diversifying your investment portfolio. However, if you sell vested shares within 30 days of vesting, the sale impacts the value reported to the ATO as income, which needs to be accurately reported to ensure tax obligations are met. This strategy can provide liquidity and reduce the risk of holding a concentrated position in company shares.

Option 3: Selling Enough Shares to Cover Tax Liability

As an ESS holder, the assumption is that you are a high income earner paying tax in the top marginal tax bracket.  For you, considering selling just enough shares, amounting to 47% of the value of your shares, may help you meet your future unfunded tax liability.  You may choose to ‘park’ these proceeds in an interest earning bank account or as an offset to your home loan.

Further, as Australian tax legislation does not require the administrator of your ESS to withhold tax, it may also be appropriate to consider selling a sufficient number of shares for the purpose of covering shares that could have a significant fall in value, leaving you short.

Emotional Considerations and Market Timing

Executives and business owners in the mining and resources sectors often develop a strong emotional attachment to their company shares, stemming from loyalty and the role these shares play in their career success. This attachment can make it challenging to decide when to sell, leading some to attempt market timing to achieve an optimal sale price. However, trying to time the market can be fraught with pitfalls; share prices can be volatile and unpredictable, often leading to missed opportunities and suboptimal financial outcomes.

A practical approach to managing this emotional aspect is dollar cost averaging. This strategy involves selling shares incrementally over time, allowing for the natural fluctuations of the market rather than relying on a single sale at a potentially elusive “optimal” price. By spreading out sales, executives can reduce the emotional stress and risk associated with trying to pinpoint the best time to sell, ultimately leading to a more balanced and less volatile financial outcome.

Practical Steps and Seeking Advice

Given the complexities of ESS and vesting, specialised advice is crucial for executives and business owners. Here are some practical steps to take when approaching ESS vesting:

  1. Understand Tax Implications: Familiarise yourself with the tax liabilities associated with ESS vesting, including potential unfunded tax obligations. This understanding helps in making informed decisions about whether to hold or sell shares.
  2. Plan for Financial Stability: Consider how retaining or selling shares fits into your overall financial strategy. Assess the potential impact on your liquidity, debt management, and investment diversification.
  3. Seek Professional Advice: Engage with a financial adviser who specialises in ESS. Their expertise can help you navigate the tax regulations and optimise your financial outcomes. An adviser can provide tailored advice to ensure that your ESS decisions align with your long-term financial goals.

Next Steps

Understanding the complexities of Employee Share Schemes and share vesting is crucial for mining and resources executives and business owners. By considering your options at the point of vesting, managing emotional attachments, and seeking specialised advice, you can navigate these financial strategies effectively and create more reward for your success!

To learn more, please contact James Marshall on +61 (0) 7 3007 2000 or email contact@resourcesunearthed.com.au to organise a 20-minute no-obligation discussion. To learn more about James, visit this link.

Resources Unearthed is a solutions hub that connects senior executives, established professionals, and business owners in mining and resources with proven specialist advisers.

Stratus Financial Group and its advisers are Authorised Representatives of Fortnum Private Wealth ABN 54 139 889 535 AFSL 357306. This advice is general and does not take into account your objectives, financial situation, or needs. You should not act on it without first obtaining professional financial advice specific to your circumstances.

*Please note: For financial advice and services relating to this matter that are not offered under the Fortnum Private Wealth AFSL, in accordance with our collaborative advice model, when required, such matters are referred to appropriately qualified professionals.


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