Payroll tax for shares and options
Shares or options granted to employees through an Employee Share Scheme are considered wages for payroll tax. Learn how to correctly calculate the shares and options component of your taxable wages.
To complete your payroll tax returns you need to work out the taxable value of all wages.
Wages include any shares or options granted to employees through an Employee Share Scheme (ESS) interest under section 83A.10 of the Income Tax Assessment Act 1997 (ITAA).
Read the full definition of an ESS interest.
Errors in your payroll tax returns may result in a tax default. In addition to any outstanding tax, you may also have to pay interest and penalty tax.
What you need to do
To correctly declare the value of shares and options there are several concepts you need to understand.
Election of a relevant day
Taxable wages arising from the grant of a share or option are taken to be paid or payable on the relevant day elected by the employer.
The ‘relevant day’ is:
- the day a share or option is granted to a person, or
- the day they vest in a person.
The relevant day is automatically chosen in certain situations due to deeming provisions in the Payroll Tax Act 2007 (PTA).
Read election of the relevant day for more details.
Calculate the taxable value of shares and options
The value of an ESS interest to be declared for payroll tax is the value on the relevant day elected by the employer, less any considerations paid or given by the employee in respect of the shares or options.
You may choose from the following valuation methods when valuing the shares or options:
- A valuation method which provides a true market valuation.
- A methodology prescribed in Commonwealth Regulations under section 83A-315 of the ITAA.
For more details read:
Work out the taxable wages in NSW
Since payroll tax is levied in all Australian states and territories, you must work out if the wages are taxable in NSW.
Nexus provisions indicate the Australian jurisdiction where payroll tax should be paid.
The taxable wage component for ESS depends on many factors, such as the time your employee spent performing services in NSW, overseas or in another Australian jurisdiction.
Read application of nexus provisions to ESS for more details, including a range of examples.
Identify any dividend equivalents
Dividend equivalents are payments in amounts equal to the dividend paid on shares to the shareholders for shares that have been allotted to employees but have not vested.
Dividend equivalents are liable wages for payroll tax.
Read dividend equivalents for more details.
Tips for getting it right
Currency conversion
Taxable wages must be declared in Australian dollars. You must convert to Australian dollars:
- the value of shares or options granted in an overseas parent company, and
- any consideration paid for them in a foreign currency.
Read shares and options granted in an overseas parent company and exchange rates for more details, including the different methods for conversion.
Check ESS in your business
You can identify whether your business has liable shares and options by:
- checking whether the business lodges ESS statement(s) with the Australian Taxation Office, and/or
- speaking with senior financial officers in your business, or in your overseas based related corporations, to confirm if ESS interests are provided to employees.
Accurate record-keeping
To help you meet your payroll tax obligations, keep records such as:
- ESS plan details
- transactions relating to grant, vest, and exercise (if applicable).
- records relating to election of relevant day of each share or option, and
- working papers for calculating the taxable values for payroll tax.
Common errors
Payroll tax audits show that customers are making the following errors:
- Not being aware:
- of any ESS offered in your company or your parent company
- that the value of shares and options arising from ESS are taxable wages, and/or
- that dividend equivalents are liable wages for payroll tax purposes.
- Incorrectly calculating the taxable value arising from the grant of shares or options.
- Using incorrect share price, vesting date or exchange rate when calculating the market value of the shares or options.
- Using a pro-rata method to calculate taxable values for employees providing services both in Australia and overseas during the vesting period. The pro-rata method is not acceptable when calculating taxable values for payroll tax.
- Not recognising that shares or options are deemed to have vested or become taxable seven years after the grant date (whether or not they have actually vested).
- Not including the taxable value of shares under the Commonwealth ‘taxed-upfront $1,000 reduction’ scheme. Although these shares are exempt for income tax purposes, they are not exempt for payroll tax purposes.
- Not claiming a refund when taxable values arising from shares or options have been declared for payroll tax at grant date which subsequently got cancelled or rescinded.
Voluntary disclosure
Contact us to make a voluntary disclosure if you have not declared all liable amounts in your returns, including previous financial years.
Voluntary disclosures attract a reduced level of penalty tax compared to cases where we identify an underpayment. The full interest rate will still apply.
Non-compliance identified through our data matching activities will result in penalty and interest charges, in addition to any underpayments detected.
Contact the payroll tax team
If you have questions about this topic call 1300 139 815 or +61 2 7808 6904 for international callers.
You can also email [email protected]