Mining and resources share price fluctuations are to be expected, which can impact both the value of your ESS and the amount of your tax liability. In some instances, an executive’s ESS tax obligation created when their shares vest, can be greater than the value of the ESS when it comes time to paying your bill.
Rather than accept what can be significant tax implications, there are strategies that can be implemented preventing executives paying more tax than is necessary.
It’s not unusual for mining and resources share prices to drop sharply. Back in 2015/16 some ASX listed mining companies experienced a share price drop of around 50%, while in July this year it was around 25% for Australian miners BHP and Rio Tinto.
In recent times, mining company share prices have dropped significantly from when the large quantum share awards vested in the past financial year. For many executives, that has meant they must now meet a tax obligation that is disproportionate to their now lower-valued shares from their ESS.
Shares awarded under an ESS generally have a taxing point at the time of vesting and whether you decide to retain the shares or sell them, the vesting results in assessable income and a tax liability for the financial year in which they vest.
For those who live and work overseas, in countries such as Canada and the United Kingdom, withholding tax is levied by the tax authority at the time of vesting. It requires the employer (through the share scheme provider) to sell vested shares and remit this amount to the relevant tax authority. This also usually applies where you are working on overseas secondment or you’re subject to your company’s tax equalisation policy, meaning at the end of the financial year, your tax liability from the vesting of your ESS has been catered for.
Not so in Australia. Here the tax liability sits with the employee.
Over the past 12 months some executives may have experienced a situation where the drop in share prices has left them with a tax bill that consumes three quarters of the gross value of the ESS.
While nobody wants to pay tax, having a healthy expectation that fluctuating share values will likely create a tax implication enables preparedness. At the very least an opportunity to sell shares at the time of vesting to pay the future liability, rather than suffer a cashflow crisis when the payment is due.
Depending on your circumstances, it could also be appropriate for some of the vested shares to be held in superannuation or a trust where dividends and capital gains can enjoy a more tax efficient environment.
For example, tax on dividends within the superannuation environment is a flat 15%, whereas high earning executives will likely pay personal tax that’s as much at 45% plus 2% Medicare Levy.
Similarly, there may be opportunity to transfer a number of shares to a no-earning or low-earning spouse who enjoys a lower personal tax rate than yourself.
For high earning, hardworking mining and resources executives, it’s understandably disappointing when you are subjected to a significant tax liability.
In something of a catch-22 situation, the nature of your work situation is that you often have little (if any) time to attend to your personal financial matters, especially those that relate to the highly complex nature of ESS.
You wouldn’t be the first executive to feel a sense of regret for not implementing strategies in advance, knowing full well that a sharp share price drop could leave you exposed to a large tax bill.
The key is to be tax-wise and organised.
Executive share scheme compliance is complicated and involves an enormous amount of record keeping that must be kept in a manner that is acceptable to the ATO. It is necessary to keep ALL documentation relating to the established cost base of vested shares. For time-poor executives this can be a significant challenge.
Further, for some executives, rather than having a comprehensive financial plan that includes a balanced portfolio of shares, their ESS is their financial plan.
This can leave their current and future wealth at the mercy of their employer’s share price. There’s no problem when its rising, but potentially devastating if the company endures sustained losses or a prolong downturn in share price.
I can’t stress enough, the value of qualified ESS financial planning advice that can place you in an informed position for making the decisions that are right for you at the time of each vesting, and then for managing your ESS generally in context of your overall financial circumstances.
You can learn more about ESS and the benefits of diversifying here.
So what’s the solution for making the most of your ESS for creating personal wealth and avoiding unnecessary tax?
Largely once your shares vest the die is cast and you will need to meet a future tax obligation. The key is to implement tax and financial planning strategies well before your shares vest.
Keep thorough records:
Should you decide to self-manage your ESS, you will need to dedicate time to understanding ATO compliance, knowing when your shares vest, calculating your tax payable at the vesting point, and keeping precise paperwork for ATO scrutiny.
Engage an ESS strategist:
While the science of ESS may be within your grasp, having the time to manage your ESS and implementing tax effective strategies may well be beyond your reach.
May I suggest you engage someone like me – a qualified financial planner and ESS strategist – who can implement systems, establish historical documentation and strictly maintain ongoing transaction records necessary for meeting ATO compliance.
The endgame is to avoid paying more tax than you should and making the most of your high income through implementation of strategic wealth management options.
To learn more about ESS, fluctuating share price and the impacts on tax, please contact James Marshall on +61 (0) 7 3007 2000 or email email@example.com
To learn more about James, visit this link.
Resources Unearthed is a solutions hub that provides integrated financial, legal, property, accounting, tax and 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 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 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.