Offered in various forms, employee stock ownership plans (ESOP), stock options, restricted stock units (RSUs) and employee share purchase plans (ESPPs) offer opportunities to invest in the success you’re ultimately helping to create. And they can represent a fantastic wealth-building opportunity. But it is an area where expats should tread with caution and not, as the saying goes, ‘put all their eggs in one basket’.
Here, we take a look at some of the considerations and potential pitfalls of employee share schemes for expats.
Sell or keep?
Upon receipt of these shares, it’s decision time – sell or keep? There are pros and cons, and the decision ultimately boils down to your personal financial goals.
Keeping a portion of the shares allows you to invest in the future growth of the underlying business, a great option when you believe in the business and its prospects. It can also help you feel greater alignment and connection to your role and your employer.
However, it can’t be an emotional decision. At the end of the day, it is still an investment, and it should align with your investment philosophy and risk tolerance. It’s also important to make sure you continue to diversify your portfolio. We’ve encountered many instances where employees have held on to all their shares and ended up with a large holding in one company. This is rarely a good approach and creates significant financial risk. No matter how successful the company is, history shows there is always a risk of underperformance.
Understanding tax implications
Further complicating matters is the potential for unfunded tax liabilities upon vesting. Without the sale of shares to cover these taxes, you may need to dip into savings or other cash reserves, diverting funds from other life or financial opportunities.
In fact, it’s essential to fully understand the potential tax implications, as tax treatment can vary. Generally, the net value received from employee shares is taxed as income upon vesting or availability, with any subsequent growth taxed as capital gains at sale. It’s worth noting that exceptions do exist, so it’s wise to seek specific, personalised advice in this area.
Structuring and planning is pivotal
Simply owning shares in your name can lead to tax implications that may be mitigated through tax structuring and strategic planning, such as using trusts, which can reduce tax liabilities under certain conditions.
In conclusion, while employee share schemes present a valuable opportunity for wealth creation, they require a measured, informed approach. Diversification remains the cornerstone of sound investment and financial wellbeing, ensuring that while you can take advantage of the success you helped to build, you don’t expose yourself to additional risk or unwanted tax implications.
Need support navigating your finances as an expat? Contact the Apt Wealth team at in**@ap*******.au or find out more at https://aptwealth.com.au/what-we-do/expert-financial-planning-for-expats/.
General Advice warning
The information provided in this blog does not constitute financial product advice or a recommendation to purchase a particular product. The information is of a general nature only and does not take into account your individual objectives, financial situation or needs. It should not be used, relied upon, or treated as a substitute for specific professional advice. Apt Wealth Partners Pty Ltd is not a registered Tax Agent. You should consider your individual situation and seek tax advice from a registered tax agent before making any decision based on the content of this document. Apt Wealth Partners (AFSL and ACL 436121 ABN 49 159 583 847) recommends that you obtain professional advice before making any decision in relation to your particular requirements or circumstances.
