We sit down with tech professionals across Sydney every week that earn a great income. Many of our clients in this sector earn well over $150,000 a year. However, a high salary does not automatically create financial certainty.
A huge part of your wealth is often tied up in company stock. Whether you hold restricted stock units (RSUs) or participate in an employee stock purchase plan (ESPP), our approach at Peak Wealth Management is to help you make informed decisions to accelerate your success. We want you to build investments strategically and pay less tax legally.
“More than 80% of US tech companies such as Adobe and Salesforce offer an ESPP to attract top talent.” According to JP Morgan
Your company shares are powerful tools for building wealth. But if you do not plan for them, they can create massive headaches at tax time.
Restricted Share Units vs Stock Options
Clients often ask us to explain the difference between restricted share units vs stock options. The core concepts are quite simple.
An option gives you the right to buy a share at a set price in the future. You hope the stock price goes up so you get a bargain. If we look at an employee stock option plan example, you might get the right to buy shares at $50 even if the market price hits $100.
Restricted stock units are different. Your company simply gives you the shares. You do not buy them out of pocket. You just have to wait for them to vest. Vesting means waiting a specific amount of time until the shares are officially yours. Today, the RSU is the most common equity reward we see.
Buying Shares at a Discount
You might also have access to an employee stock purchase plan. We often just call this an ESPP.
This program lets you buy company shares at a discount. You use money straight from your paycheck to buy them. Participating in an employee stock purchase plan is a great way to accelerate your wealth.
However, this reduces your monthly take-home pay. We help clients build a tracked, visual cash management strategy where you can to see exactly how this impacts your cash flow before you commit.
The Vesting Tax Shock
This brings us to the biggest pain point for tech employees. The restricted stock units tax implications shock many high earners.
According to the Australian Taxation Office (ATO), your RSUs count as ordinary income the exact moment they vest. If you earn $160,000 and $40,000 worth of shares vest, your taxable income becomes $200,000. You have to pay restricted stock units income tax at the top marginal tax rate.
The same applies to your ESPP. The employee stock purchase plan tax rules state that the discount you receive is a taxable benefit. You must include this in your employee stock purchase plan tax reporting.
While managing tax is important, it is not always the primary goal. Your strategy depends entirely on what you want to achieve.
For example, we might look at a few different scenarios based on your goals:
- If your goal is to buy a family home soon, we might plan to sell your shares as soon as they vest to build your deposit. You pay the tax, to purchase a house.
- If your goal is long-term growth, we might hold the shares for over 12 months. This helps you get the Capital Gains Tax discount. We build a plan around your life. We make sure you are ready for the tax impact while funding your actual goals.
- We also ask our clients a very simple question. Imagine your company gave you a cash bonus instead of your RSU grant. Would you use that cash to buy your company stock at its current price? If the answer is no, you might not keep the shares just because you received them. It is very common to hold onto company stock out of habit. We help you look at these shares objectively. Sometimes the best choice is to sell them and buy different investments. This reduces your risk and aligns your money with your actual goals.
Leaving Your Job or Working Private
What happens to your employee stock purchase plan after leaving company employment? Usually, your payroll deductions stop immediately. Any unspent money is returned to you. If you have unvested RSUs, you generally forfeit them when you resign.
Things also get complicated if you hold restricted stock units private company shares. If your company is not publicly listed, you cannot easily sell a portion of your shares to cover your new tax bill. We help clients model these exact scenarios to protect their assets.
Accelerating Your Success
Having a high net worth on a spreadsheet is nice. But real success is turning those shares into the life you want.
People at different life stages have different goals. Maybe you want to use your shares to secure a mortgage and need property advice. Maybe you want to diversify away from your employer to reduce risk. We work with you to build a comprehensive plan that works for your specific stage of life.
You just need a clear, organised strategy for your company stock.
Frequently Asked Questions
“An Employee Stock Purchase Plan (ESPP) allows employees to buy their company’s stock directly at a discounted rate, making it an attractive employee benefit. Through payroll deductions, employees accumulate funds over a specified period, typically between the offering date and the purchase date. Upon the purchase date, these accumulated funds are used to buy company stock, often at a discount of up to 15% from the market price.” Source: Investopedia
The main benefit is buying shares below market value. However, the ATO taxes that discount as income. The real tax benefit comes later if you hold the shares for over 12 months to qualify for the Capital Gains Tax (CGT) discount.
Usually, no. Until your RSUs vest, you do not actually own them. Once they vest, you fully own the shares. Then you can sell them or transfer.
Typically, you do not receive restricted stock units dividends before they vest. Once the shares vest and become yours, you can receive dividends just like any other regular shareholder.
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