Employee share schemes are designed to give employees a share ownership in the company they work for. This can be structured in various ways and may involve the employee receiving the shares or options in the company. The shares can be issued for free, for a discount below market value, or at full market prices. In addition, the schemes could involve finance provided by the employer and/or performance hurdles before the employees receive the shares.

Employee share schemes have been shown to assist a company to attract, retain and motivate their staff as they align the employee and employers interests. The majority of Australian Stock Exchange listed companies have employee share schemes in operation. Many small family run companies also have an employee share scheme in operation to convert the employees into business owners as well.

Employee share schemes can be very tax effective for both employers and employees. For example, if an employee share scheme was structured so each fulltime employee received $1,000 of free shares each year it would have the following tax benefits:

  • The employer receives a tax deduction for the market value of the shares issued to employees (i.e. $1,000 deduction for each employee).
  • The employee receives the first $1,000 of employee shares per annum tax free.
  • When the employee sells the free shares they are only taxed on the capital proceeds that exceed $1,000.

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