Tax Deferred Salary Sacrifice Plan

1 Feb 2021

A Tax Deferred Salary Sacrifice Plan allows employees to defer tax payments in relation to their employee share scheme interests to the income year in which the deferred taxing point occurs. It is a common share plan used by listed companies in Australia to reward employees and provide them with tax benefits. 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. The very term ‘salary sacrifice’ refers to the fact that the employee is sacrificing a segment of their salary in return for other benefits.

A 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:

  • 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 market for the employee.
  • The employee’s taxable income reduces by the amount they contribute to the Tax Deferred Salary Sacrifice Plan. Shares are then held in holding lock for a 3-year period from the date of allotment.

What benefits can employees receive from the Plan?

Employees can enjoy a number of potential benefits under a Tax Deferred Salary Sacrifice Plan including tax savings where they can save on income tax, acquiring shares of a company, increased flexibility on the amount they want to contribute towards the Plan, and potential for capital gains if the share value increases over time. These types of agreements are also voluntary, which means employees can opt in and out of the employee share scheme as needed depending on the conditions.

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:

  • Vesting/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.
  • Dividends and voting privileges – full dividend and voting privileges apply to the shares.
  • Leavers – employees retain their shares. Any remaining holding locks are lifted.

What are some taxation considerations to be aware of?

While the benefits of employee share schemes can be attractive, it is important with any employee equity plan to obtain professional tax advice. 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.

BoardRoom’s market-leading Employee Equity Plan team has vast experience managing Tax Deferred Salary Sacrifice Plans for multiple listed companies. If you would like to learn more about how this share scheme works or how other types of salary sacrifice arrangement work, please do not hesitate to contact us to see how we can help.

Contact BoardRoom for more information:

Tom Bloomfield

General Manager, Growth & Partnerships
+61 2 9290 9617