There are ongoing Executive Share Scheme (ESS) commitments for mining and resources personnel that go beyond your term of employment. For those who move on from the employer that first granted their ESS or if they retired, were terminated, the role they worked in was made redundant or even if they passed away, there will be a range of ESS matters that will need ongoing active management. Here we consider important and complex matters that require advice for making the most of the wealth opportunities ESS brings and how those matters need to integrate with your bigger-picture financial goals.
Rather than singularly focussing on your ESS, it’s important to consider it a part of a bigger financial plan that aims to achieve your wealth and lifestyle goals. The inherent complexity and time-consuming nature will dictate the need for ongoing advice and professional management.
Multi-jurisdictional tax advice
Even if you are no longer employed and you have returned from overseas, there may be foreign tax issues such as transactions occurring following your departure from the company (and the country in which you were working), that result in a foreign tax liability. This will include vesting, sales transactions and matters relating to meeting performance criteria.
For example, you may have retired or perhaps your position was made redundant, and you held awards with future transactions or vestings, (in particular performance shares), which were timed to take place regardless of your changed circumstances.
Many large mining and resource companies also have tax equalisation policies that apply to your ESS while seconded overseas. If not observed and checked, these policies can result in you being short changed. There is also potential for you to be disadvantaged in terms of premature sale of shares from your ESS should you be subjected to ‘hypothetical’ withholding taxes on vesting.
Record Keeping advice
As a consequence of the time-consuming and complex nature of ESS, many executives fail to keep records, and for those who do, often those records are not of a ‘detailed-enough’ nature to be useful. Clear and detailed records are imperative for understanding for making informed decisions, not just what your after-tax position is, but also for your after-employment consequences which allows you to make properly informed decisions.
For example, when an executive accepts redundancy or leaves under a ‘good leaver’ provision, the number of shares from each grant is generally applied pro-rata on the number of service days served over the period from grant to vest. The pro-rata awards then generally vest on the cessation of employment (noting special conditions apply for performance shares).
For executives who resign or who are terminated, awards are generally forfeited in full with no pro-rata of awards being received. These executives will generally receive the value of any shares purchased using contributions made under a matching scheme. In both leaving situations, keeping clear ESS records will allow you to validate calculations to understand your position, ensure you meet your tax obligations, and receive your full entitlement.
Establishing the cost base for each parcel of acquired or vested shares is key to understanding the capital gains tax implications of a number of strategic approaches available to you. Without documentation it becomes a costly and time-consuming process to re-establish historical cost bases.
Importantly, it’s an ATO requirement ‘for every transaction, event or circumstance, that may be relevant to working out whether you’ve made a capital gain or loss.’ Record keeping is imperative for this to happen.
As ESS specialist strategists, we regularly reconstruct records for executives and we have systems in place for capturing ongoing information necessary for recording and maintaining accurate cost base information at each vesting and exercise.
Investment diversification advice
The very nature of an ESS is that the majority of your share portfolio is tied to that company. Having all your wealth creation and income generating eggs in a single ESS basket exposes you to fluctuations in the company’s performance. Should the company not perform (or share price or dividend fall), there is a decrease in dividends, you could find yourself with a cashflow shortfall that could significantly affect the affordability of your lifestyle.
The key is to implement a more balanced portfolio that includes your ESS but spreads your investments across a broad range of quality investments. The purpose is to create alternative income streams that are not solely reliant on the performance of your ESS and to reduce the impact of having all your employment income and a large proportion of your investment portfolio tied to your employer.
Bigger Picture – Financial Priorities
In addition to ongoing management of your tax obligations and implementing a more diversified portfolio that has the potential to generate alternative income streams, your ESS as part of your personal wealth must be considered in context of other matters including your estate planning.
Even when you are gone, there can be significant tax obligations for your estate and beneficiaries. It is important to attend to personal insurances, asset protection and tax effective structures, your will and estate plan, so that those you love inherit your significant wealth, rather than a significant tax bill and legal angst that will surely be associated with sorting out your affairs if you fail to keep clear records.
May we refer you to a recent case study that we refer to as a cautionary tale. You’ll understand why when you read it.
We understand that ESS complexity can be paralysing. It’s time consuming and it requires specialised knowledge that is usually outside the skillset of most financial planners, accountants and legal advisers. However, failing to take action can have long term financial and legal ramifications.
Your first step is to resolve to take action as soon as possible. Next, collate your ESS information which should include: Records for grant and vesting, tax statements, tax returns, your letter of redundancy or company approved retirement documentation along with any other documents you may have received from your share administrator, and contact us, or a qualified financial planner who specialises in ESS strategy.
For more information about the financial matters, you need to consider when returning to Australia, please contact James Marshall, Financial Adviser and ESS Strategist +61 (0) 7 3007 2000 or email email@example.com.
Resources Unearthed is a solutions hub that provides integrated financial, legal, property and accounting & business advisory services for executives, professionals and business owners in the mining and resources sectors.
Stratus Financial Group and its advisers are Authorised Representatives of Fortnum Private Wealth ABN 54 139 889 535 AFSL 357306. This information does not consider your personal circumstances and is of a general nature only. You should not act on it without first obtaining professional financial advice specific to your circumstances.
*Please note: As advice and services relating to this matter 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.