Your paycheque is more than a transaction. It’s a key to financial autonomy and freedom. With employee share schemes, you get an additional slice of the financial pie. And turning that slice into a substantial asset is not just a possibility—it’s within reach.
In Australia, employee share schemes have found a place in modern business practices, offering an effective way to cultivate employee loyalty and acknowledge hard work. A widely adopted, popular method, they play a significant role in how some businesses engage and incentivise their workforce. However, it’s important to understand how they can impact your overall financial situation. At First Financial, we can help clients navigate all areas of the pathway to wealth, including employee share schemes.
Employee share scheme (ESS) basics
Corporations worldwide utilise ESSs to boost workplace morale, attract talent, encourage retention and motivate employees to give their best at work because having a financial interest in the company leads to a vested interest in its success.
Your employer will design an ESS in adherence to Australian tax laws. Typically, you will receive all details, including an outline of your options and the associated consequences.
You may also have a scheme from your employer where you can voluntarily purchase shares in the company you work for, often at a discount to the market price.
How an ESS enhances wealth building
Participating in an employee share scheme offers employees a spectrum of benefits that provide a direct route to financial growth. Beyond the monetary gains, your mindset should shift from an employee to an owner, instilling a deeper commitment and contributing to heightened job satisfaction and loyalty.
Having an investment strategy is a key element in building wealth, and an employee share scheme can be a valuable asset within your portfolio. The potential for share growth over time can significantly contribute to savings, retirement planning and long-term prosperity.
If entering an ESS is your first investment, this is a practical chance to learn the nuances of investing and explore diversification strategies. While it enhances financial literacy, remember that seeking advice from your financial adviser is key. They can help you make informed decisions that maximise ESS benefits and set the stage for future investments.
Cons and challenges
Navigating an ESS can come with its share of challenges and limitations. From restrictions on the timing of buying and selling shares to performance targets and potentially having obligations to give back or sell shares upon leaving the company, it’s not all straightforward.
Then there’s market volatility. Like any other investment, you can incur losses if the company’s value plummets or if it goes out of business. Once again, this emphasises the importance of consulting a financial adviser before making investment decisions.
Tax implications
While receiving an ESS is typically extremely beneficial, there are tax implications. One of our Principals, James Wrigley, says: “It’s crucial to anticipate future tax implications from the outset. When the shares vest, you may face a tax bill, which some people are well-prepared to cover with available cash. If not, then selling a portion of the shares is an option.
You also need to consider capital gains tax (CGT) liabilities because if you sell your shares when they vest, there could be a gain. There is a small, typical, 30-day window after vesting when you can sell shares without CGT liability, but you will still need to pay income tax. After this period, both CGT and income tax apply.”
Talk to the financial planning experts
If you receive an invitation to join an employee share scheme, you should first ask some important questions. At First Financial, we can walk you through the benefits and challenges so you can make an informed decision that will enhance your financial future.
We believe everyone can build wealth using a systematic, structured approach tailored to their circumstances and goals.
To learn more about employee share schemes, investment management or retirement planning, speak with a member of our friendly team today.
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