Employee share schemes in Australia: RSUs, ESPPs and options explained

If you work in tech, part of your pay probably comes as shares. RSUs, an ESPP, options, or a mix of all three.

They’re all employee share schemes, or ESS. The ATO taxes them under one set of rules. But each type works differently, and the mistakes are expensive.

The three types you’ll see

• RSUs (restricted stock units). Shares you’re promised, which vest over time if you stay. Most US listed tech companies use them. You pay nothing to receive them.
• ESPPs (employee share purchase plans). You buy shares from your salary, usually at a discount of up to 15%, every six months or so.
• Options. The right to buy shares at a set price later. Common in startups and companies heading to an IPO.

How RSUs are taxed

Most RSUs fall under the deferred taxing rules. The taxing point is generally when they vest, as long as there’s no real risk of losing them and no genuine restriction on selling.

The market value on that day is added to your income and taxed at your marginal rate. For most tech executives, that’s 47% including Medicare.

For grants from 1 July 2022, leaving your job is no longer a taxing point. The longest a taxing point can be deferred is 15 years.

If you’ve just had a big vest, read I just vested $500K of RSUs. What now?

How ESPPs are taxed

With an ESPP, the discount is the taxable part. Buy about $23,500 of shares for $20K at a 15% discount, and the $3,500 or so of discount is generally taxed as income in the year you buy.

Some schemes give a $1,000 tax free reduction, but only if your adjusted taxable income is $180K or less. Most of the people I work with earn well over that.

What you paid, plus the taxed discount, becomes your cost base. Growth after that is a capital gain.

An ESPP discount is one of the few genuinely good deals in tech pay. I usually tell clients to take part, then sell soon after each purchase to lock in the discount.

How options are taxed

In a deferral scheme, options are generally taxed when you exercise them and the shares are free to sell. You’re taxed on the market value of the shares, less what you paid to exercise.

Eligible startups can offer the startup concession, where the discount may not be taxed up front and you only pay capital gains tax when you sell. The company generally needs to be unlisted, under 10 years old, with turnover of $50M or less.

Options are the hardest to plan around. Their value can fall to zero before you ever exercise.

The mistakes I see most

• No cash set aside for tax. Employers usually don’t withhold tax on ESS income. The bill arrives months later.
• Holding everything. Your salary, bonus and shares all depend on one company. I tell clients to sell 50 to 70% at vest, and keep any one company to a third of their net worth at most.
• Forgetting the ESS statement. Your employer reports ESS income to you and the ATO after 30 June. Your tax return has to match it.
• Ignoring currency. Most tech shares are priced in US dollars. Values convert to Australian dollars on the taxing date, and again when you sell.
• Rushing to beat the 2027 CGT change. From 1 July 2027, the 50% discount is replaced by indexation and a 30% minimum tax on real gains. Gains up to then keep the discount, so there’s no deadline.

Turning shares into income

Employee shares are often the fastest way people in tech build wealth. Handled well, they fund the first years of an early retirement. Handled badly, almost half goes to tax and the rest rides on one share price.

I help tech executives build a sell down plan around their vest schedule. See my employee share scheme advice and RSU advice.

The free RSU Playbook covers the tax trap and the 33% rule in detail.