Maximising the Benefits of Employee Share Schemes: Strategies for Financial Growth

Employee Share Schemes (ESS) are a valuable way for employees to share in the ownership of the company they work for, offering potential financial benefits beyond their regular salary. While owning shares in your employer can provide long-term growth, it’s crucial to develop strategies that maximise the financial opportunities available through your ESS. With the right approach, your shareholding can become a cornerstone of your wealth-building plan.

Debt Recycling: Turning Shares into Home Loan Reduction and Growth

Debt recycling is a smart financial strategy that allows you to replace non-deductible home loan debt with deductible investment debt. The process involves selling shares from your ESS, using the proceeds to reduce your non-deductible home loan, and then borrowing against your home equity to repurchase those shares or other investments.

This strategy offers two main benefits:

• Debt Reduction: By paying down your home loan, you reduce non-deductible debt, bringing you closer to your objective of paying off your home.
• Tax-effective investing: Borrowing to invest allows you to benefit from potential long-term capital gains, while enjoying the tax-deductibility of the interest on the loan. The ongoing tax benefit of each amount of recycled debt could be thousands of dollars per annum.

While some say debt recycling brings some market volatility risk, your overall level of debt and market exposure remains unchanged. Do note however, shares you have held for some time may incur Capital Gains Tax (CGT) when sold if they have grown since the time of vesting. Furthermore, if shares are sold at a loss, care must be taken around the ATO’s wash-sale provisions.

Transferring Shares to Other Ownership Structures

Another strategy is transferring your ESS shares into alternative ownership structures such as family trusts, or companies. This can provide flexibility in managing your tax position and allow for income or capital gains distribution to family members on lower tax rates.

Additionally, holding shares through a trust or company may offer asset protection, shielding your shares from creditors. However, there are tax consequences and administrative costs to consider when setting up these structures, so it’s essential to seek professional advice from a financial planner or accountant.

Another simple option is transferring into the name of your partner if they are in a lower tax bracket.

In all cases, care needs to be taken with regards to the employer scheme’s rules around ownership, employment requirements, and bonus share issues.

Contributing Shares to Superannuation

Contributing your ESS shares to superannuation is a tax-effective way to boost your retirement savings. This can be done as a tax-deductible contribution, subject to the concessional contribution caps. More commonly this is done as an after-tax contribution, purely for the purpose of sheltering the shares in the low-tax superannuation environment. Some funds will accept an in-specie contribution of the actual shares, whereas many funds will only accept a cash contribution from share sale proceeds.

The shares or alternative investments within your super fund can continue to grow tax-effectively (15% tax rate on income, 10% CGT rate, and an amazing 0% for both in the retirement phase), helping build your retirement wealth. However, once cash or shares are contributed to super, they typically become inaccessible until you reach preservation age, making this strategy suitable for long-term planning.

How AGS Financial Group Can Help Optimise Your Employee Share Scheme Strategy

At AGS Financial Group, our team of expert financial planners, accountants, and mortgage brokers work together to ensure that your participation in an Employee Share Scheme becomes a key component of your overall financial strategy. Whether you’re looking to implement debt recycling, explore ownership structures, or contribute to super, we provide tailored advice to help you maximise the benefits and manage any potential risks.

If you’re interested to explore how we could help, just book an initial discussion with one of our financial planners, with no cost or obligation. Together we can see if there’s a good fit for some strategic planning, and discuss next steps.

Published : 26 Sep 2024