Tax Deferral Question on Salary Sacrifice Shares

Evening All,

My company is offering a salary sacrifice share plan where we can purchase up to $5k pa in the companies shares with our pre-tax earning. The caveat is that I can only sell the shares after holding them for two years of ceasing my employment at the company.

Seems like a good deal which I signed up for. I later read in the fine print that this is considered "tax deferral" and it says you would pay tax at the time the shares are released (I assume this is after the two years passes).

My questions are:
* Would the purchase price of the shares be added to my gross income in two years time when the shares are released to me?
* If I move up at work in that time into a higher tax bracket, wouldn't I prefer to get hit with the tax now rather than in two years?

Thanks in advance. :)

Comments

  • +1 vote

    What if you sold in early retirement when you have no income

    Can’t have your cake and eat it, you either defer it and pay what ever your tax rate is later, or buy post tax

    How about invest the tax savings now and out do your potential extra tax later

    • +1 vote

      Thanks for your reply.

      That would be fine if I could sell at retirement. But it made it sound like they would be released at the two year mark and I would be taxed then, regardless of if I was ready to sell.

      • +1 vote

        No idea, sounds like a few hundred bucks at worst. I wouldn’t sweat it given you have already committed.

  • +3 votes

    You reduce your income tax now, for example you earn 100k without the salary sacrificed shares and pay tax on 100k. Or you get paid 95k + 5k in shares, you get taxed 95k now. In 2 years time your shares might double meaning 5k profit, there is a 50% CGT discount applied. In 2 years time you will pay tax on 100k income (or whatever your income is in 2 years) + 2.5k CGT.

    You need to read up on 2 separate topics even though it feels like it's linked its not, just google it first.
    1. Salary Sacrifice
    2. Sale of shares and capital gains tax.

    If you cbf looking into it, the short answer is yes it's a good deal *so long as the total share value doesn't drop below the amount of tax you saved from salary sacrifice.

      •  

        Thanks. I understand how the capital gains tax works. I was just under the impression if I salary sacrificed I would not be paying tax on that $5k ever, but it would appear that in two years time I will pay:

        tax on income + tax on the $5k from this year + 50% tax on any capitol gains made.

        So I am worried if I get promoted within the next two years and move into the next tax bracket that when I get charged tax on this $5k it will be charged at a higher rate.

        Im not really worried as its only tax on $5k. But Im more wondering how people use this as a loophole/advantage if it is only deferring the tax. Unless it is deferred to retirement or a time when they are in a lower tax bracket.

      • +1 vote

        You don't pay the tax on the 5k from this year at all, ever - that's the benefit of salary sacrifice.

        2 years time you will pay tax on income only.

        At the 2 year mark you have the option of selling the shares but you don't have to sell the shares, you pay the CGT when you choose to sell the shares, which could be 2,3,10, 20 years from now.

        •  

          Thanks arkie. That is how I previously understood it until today when I read "this is only a tax deferral. You will be tax on this amount when the shares are released."

          • +1 vote

            @chasis: Probably better to ask payroll if you want clarification, can only get general advice here and the share scheme can vary from company to company.

        •  

          I had a somewhat similar share purchase plan where the shares were offered at a discount to the market price. I did get taxed on that difference between market price and the discounted price - overall it was still a win.

          To be fair, since its capped at 5k your exposure is going to be a few hundred dollars at most. Most of the times I'd recommend talking to a tax professional, but this is small enough to take a punt. A good tax accountant would probably charge you more than that in fees.

    • +1 vote

      so long as the total share value doesn't drop below the amount of tax you saved from salary sacrifice.

      This is the key bit…. Also you have no control over when they are really sold, so you could miss a crazy spike in the share price, think GME :)

      Its pretty much buy, forget about it until 2 years after you leave and then hope the share price is higher!

  • +1 vote

    This is something that you probably want to discuss with your accountant, or at least with the financial players in your organisation.

    As already mentioned, if you salary sacrifice, then you will be buying with 'pre-tax' dollars, which would reduce your taxable income for the year in which you purchase the shares.
    Only in the future IF you realise 'capital gains' from the sale of your shares would you then need to pay capital gains tax on those shares sold.

    However… there may potentially be some other factors at play. It's possible that given the offer, there may be some Fringe Benefit Tax that is applicable, although it will depend on the exact method by which the shares are offered, and at what price they are offered vs the market price. It's also possible that the organisation will swallow any FBT obligations, and not push them onto you.

    This is of course what accountants are paid to know the ins and outs of… so you can't be coming after OzBargain if you end up with dud shares, your partner leaves you for a richer individual, and takes your dog with them… that's all on you..

  • +1 vote

    If the shares have gone up in value you will be assessed on:
    1. ESS discount, the difference between what you sacrificed and the market price for the shares when they are acquired.
    2. You also will have to pay capital gains
    The tax rate will be whatever bracket you are in that particular year.
    If the shares are under your purchase value, then you wont have to pay the ESS discount when they vest, but depending on when you sell there may be a capital gain or loss.
    Dyor and seek advice from the ATO or your accountant

  • +1 vote

    In the long run if the shares go up you get the profit at a discounted 50% capital gains tax after one whole year, but as you acquired allot more shares as they were tax free you make allot more.

    The downside is that eventually you need to pay the tax you should have paid when you acquired the shares.