A Tax Deferred Salary Sacrifice Plan is a type of employee share scheme (ESS) in Australia that that allows employees to defer tax payments on their ESS interests to the income year in which the deferred taxing point occurs. This enables employees to sacrifice a portion of their salary to acquire shares in a tax-efficient manner, with taxation occurring at a later stage, typically when restrictions on the shares lift or when the employee leaves the company. Key information about the share plan is outlined below.
What does salary sacrifice mean?
Simply put, a salary sacrifice arrangement is made between companies and employees to reduce their pre-tax income in exchange for some other non-cash benefit, such as shares in an employee share scheme.
With a Tax Deferred Salary Sacrifice Plan, employees choose to salary sacrifice Australia-based earnings to purchase shares in their employer’s company. Instead of being taxed upfront on these shares, the tax liability is deferred to a later tax deferred plan event. This strategy can help employees reduce their taxable income while benefiting from long-term investment growth.
Brief summary of the Tax Deferred Salary Sacrifice Plan
Generally, the Tax Deferred Salary Sacrifice Plan is utilised by Australian listed companies and can be made available to all their employees globally.
Under the Plan:
Pre-tax salary contributions
An employee can salary sacrifice up to AUD $5,000 per annum, pre-tax. These monies are then used by a company to buy shares on the market for the employee.
Tax deferral benefits
The employee’s taxable income is reduced by the amount they contribute to the Tax Deferred Salary Sacrifice Plan.
Holding lock period
Shares are then held in a holding lock for a 3-year period from the date of allotment.
What are the salary sacrifice benefits of a Tax Deferred Plan?
Employees can enjoy several potential benefits under a Tax Deferred Salary Sacrifice Plan, including:
1. Tax savings
By contributing to a salary sacrifice Australia plan, employees reduce their taxable salary, which may result in lower overall income tax payments. The deferred taxation on shares can also provide additional tax advantages.
2. Share ownership and capital growth
Employees gain ownership of company shares, which can appreciate over time, offering potential long-term financial gains.
3. Flexible investment approach
A tax deferred plan allows employees to tailor their level of participation, making it a flexible investment option that aligns with their financial goals.
4. Employer incentives
Employers who offer salary sacrifice benefits through a Tax Deferred Salary Sacrifice Plan may enhance employee retention and engagement by providing a valuable financial incentive.
What are the conditions of the Plan?
As with any employee equity plan, there are certain obligations and conditions under the plan rules. With a Tax Deferred Salary Sacrifice Plan, these are commonly:
1. Vesting and holding restrictions
Shares are held in holding lock for a 3-year period from the date of allotment, meaning employees cannot sell those shares until after this restricted period expires.
2. Dividends and voting privileges
Employees maintain full dividends and voting rights for shares acquired under the tax deferred plan, even during the holding period, unless specified otherwise in the terms of the plan.
3. Leaver provisions
If an employee leaves the company before the restriction period ends, they retain their shares, and any remaining holding locks are lifted.
What are some taxation considerations of a Salary Sacrifice Australia Plan to be aware of?
While the benefits of employee share schemes can be attractive, it is important to obtain professional tax advice with any employee equity plan. Broadly, tax points to note under a Tax Deferred Salary Sacrifice Plan include:
- Annual employee share scheme tax statements must be issued for Australian employees.
- Employees are responsible for their personal tax requirements with respect to their equity.
- For Australian employees, shares are taxed upon the expiry of the holding lock.
- Companies may be eligible for tax deductions under the plan, for example, by using an Employee Share Scheme Trust to claim a tax deduction.
- Discounts provided to employees on goods or services by their employer, such as through an employee share scheme, may be considered taxable discount income and subject to income tax at the employee’s marginal tax rate.
How to set up a Tax Deferred Salary Sacrifice Plan?
Before deciding to set up a tax deferred plan, you should carefully consider all the implications it may have on your employees’ income tax and financial interest.
The following steps are essential:
1. Establishing Plan Rules and Conditions
- Define eligibility criteria: Specify who can participate in the plan (e.g., full-time employees, senior management, etc.).
- Set contribution limits: Establish annual contribution limits and whether these limits will be adjusted based on salary or specific rules.
- Determine the holding lock period: Define the minimum period during which employees must hold their salary-sacrificed equity or benefits.
- Ensure compliance with ATO regulations: Make sure the plan meets the Australian Taxation Office (ATO) guidelines for employee share schemes to avoid any penalties or tax complications.
2. Engaging an Equity Plan Provider
Many companies partner with equity plan administrators like BoardRoom, who specialise in the efficient management of employee share plans and salary sacrifice benefits. This ensures seamless administration of tax calculations, compliance reporting, and effective communication with employees.
3. Communicating the Plan to Employees
- Clear communication: Employers should provide detailed, transparent information about the tax deferred plan, including its benefits, risks, and tax implications
- Employee education: Companies should provide resources to help employees understand how salary sacrifice works and how it might impact their retirement savings or long-term financial goals
4. Ensuring Ongoing Compliance and Reporting
- Monitoring compliance: Regularly review the plan to ensure ongoing compliance with relevant tax laws and regulations.
- Tax reporting: Ensure proper tax reporting to the ATO, especially at the end of the financial year or when employees exit the plan.
BoardRoom: Your partner for Tax Deferred Salary Sacrifice Plans in Australia
At BoardRoom, our Employee Equity Plan team has extensive experience in managing Tax Deferred Salary Sacrifice Plans for Australian-listed companies. We provide comprehensive guidance to ensure compliance with ATO regulations and maximise employee salary sacrifice benefits. Leveraging our enhanced expertise from the acquisition of Solium Capital, BoardRoom is uniquely positioned to deliver seamless and impactful administration of Employee Share Plans and Tax Deferred Salary Sacrifice Plans.
If you are considering implementing a tax deferred plan for your organisation or want to understand how different salary sacrifice arrangements work in Australia, contact us to see how we can help.
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