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The Payroll tax guide: Shares and options provides detailed information and examples about Employee Share Scheme interests and payroll tax in New South Wales. For more general information read the shares and options page. We advise that you read this guide with:

Chapters

1. What is an Employee Share Scheme (ESS) interest?

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Definition

Shares and options provisions under Division 4 of Part 3 of the Payroll Tax Act 2007 (PTA) apply when an employee, a director, or former director of a company acquires an Employee Share Scheme (ESS) interest.

ESS interest is:

a beneficial interest in a share in the employing company, or its subsidiary, or
a right including an option to acquire a beneficial interest in a share in the company, as defined in section 83A.10 of the Income Tax Assessment Act 1997 (ITAA).

Shares, rights or options granted under ESS are considered wages and you must declare the values for payroll tax.

When does Division 4 of Part 3 of the Act not apply?

When the benefit does not meet the definition of an ESS interest it may be wages under another Division of Part 3, including:

a fringe benefit
remuneration under a relevant contract, or
a benefit provided to an employee based on the value of shares, rights or options.

Examples of non-ESS interest

Open the headings below to read the examples.

Fringe benefit interest

An employer granted some shares to an employee in relation to his employment.

The company in which the shares are granted is not a related corporation of the employer. Therefore, the shares are a non-ESS interest and are taxable as fringe benefits.

The value of the shares to be declared for payroll tax is determined by the Fringe Benefits Tax Assessment Act 1986.

The employer should declare the amount as part of its liable fringe benefit taxable values in the corresponding payroll tax year.

Phantom share scheme / shadow share scheme

A company uses a phantom or shadow share scheme to offer incentives to employees.

Employees are rewarded with a cash bonus based on an agreement set out in the scheme rather than getting any shares in the company.

The cash bonus is subject to payroll tax as normal salary and wages under section 13(1) of the PTA.

Stock appreciation rights

A company uses stock appreciation rights (SARs) to give employees contractual rights to a cash payment at a future time or event, where the payment is calculated based on the market value (or increase in the market value) of the company’s shares.

The cash payment is subject to payroll tax as normal salary and wages.

Indeterminate rights

A company gives employees indeterminate rights to potentially acquire a share or a specific number of shares at a future point in time, but the number of shares to be acquired is not yet determined.

An indeterminate right is not an ESS interest at the time the right is granted. The right is not subject to payroll tax because it is uncertain whether a beneficial interest in a share will be acquired in the future.

The right becomes an ESS interest on the date that shares, or options are granted. Division 4 of the PTA applies at that point.

Employee remuneration trusts

A company establishes an employee remuneration trust to facilitate the provision of payments or benefits to employees. The trustee of the trust receives money or assets from the employer and provides benefits to employees.

The shares and options provisions under the PTA do not apply to the payments made through this scheme as the employees never receive the shares in the company.

Instead, the value of any benefits the employee receives is liable for payroll tax as a bonus under section 13(1) of the PTA.