Tech Employee Stock Plans, Teal & Television

Being stuck in home isolation can do weird things to people. After trying (fairly poorly) to get a full day of work done each day, I reverted to the Netflix / ABC News / Kayo Sports continuous loop. It led to a few late-night musings:

1)     Why do the Americans call jam, jelly?

2)     What colour is teal?

Canva - don’t think I’ve forgotten about you. You’re up in the next blog.

3)     After next weekend, will we hear the word “teal” again for the next three years?

4)     The stock markets, particular tech stocks, are getting smashed of late.

Having had a background in the ESOP world, it’s been awesome that AKL Tax has built a strong client base in the Australian tech industry.

The industry’s go-to offering to staff – the All-American RSU (Restricted Stock Unit), has been awesome in building employee wealth as the business itself grows. This wealth creation over the last few years has been evident by the rising listed share price of the business / external valuation / monster payday upon IPO or sale.  

But what about when this Cinderella story doesn’t happen?

Getting this reference isn’t a prerequisite to being a favourite client, but it will help.

I loathe using the Australian tech darling of our generation as an example – Atlassian – however their share price has slid at a faster velocity than my almost-three-year-old on that big slide in Kurnell (if you’re a parent in the Shire, you know).

The jury is still out over who was more scared.

For those who aren’t regular trawlers of the ticker prices, the NASDAQ:TEAM price has moved from USD $317 in April 2022, to about USD $189 as at time of writing.

Could be worse. Could be TerraUSD.

If you’re a passive investor and you’re riding the ebbs and flows, you may be thinking, no biggie. Ride it out, etc.

But what if you’re in their RSU program, where you receive vested shares across a predetermined timeline?

If you had a vesting point around April, on the assumption you’re getting well paid for your services, you’re up for tax on 47% on the value of the Atlassian share at that time, payable in your 2022 tax return.

Using the example above, you’re liable for approximately USD $149 in income tax on that particular share, which, as of writing, is now currently worth USD $189.

This all needs to be converted to AUD at various time points - take note, crypto clients!

Without selling some of your underlying shares (and/or a kidney) at the time of vesting, which is possible in some RSU programs (the share selling, not the organ selling), funding the tax will be difficult for some employees in this position. You’re up for tax on something you haven’t yet - or don’t want to - sell.

It’s lose-lose. You have to sell the asset, to pay the tax on that same asset, which isn’t worth as much anymore!

(I’m tempted to keep a swear jar simply for these future conversations with clients).

The key question I’m sure some employees are asking - can you do anything about it?

In short: not really.

The ESS rules are clear in how they work in this scenario – you’re getting taxed on the market value of the share at the time of the taxing point (assuming you received it for nothing).

Even worse, if you sell the shares to pay some of the tax after realising your liability (which could be up to two years after vesting date), the potential capital loss on the share can’t even be used to offset the current year ESS income derived. This is because capital losses are quarantined, only to be utilised against future capital gains.

You can however mitigate, or smooth the damage, by planning any future disposals of the shares you hold.  

If you hold onto the shares, you may eventually sell some of these shares in the future.

As you likely have more than one share in the company, when you do sell some of your shares, you can choose under the CGT rules which of those particular shares you are selling.

If you’re looking to keep your CGT bill down, it may make sense to sell some of your shares with a higher CGT cost-base.

We’re looking at you, October 2021 Atlassian shares.

For CGT, in some circumstances you’re working to the notion of “buy high, sell low”. When you have the choice and ability to, anyway.

Record keeping is crucial though. If you can’t prove which shares you sold, the ATO may just turn around and say that you sold the first shares you ever acquired in the company.

Moral of the story? Keep a detailed CGT schedule or all the vesting dates, prices, and eventual disposals. The share corporate registries don’t do this for you, and if the ATO ever comes knocking, you’ll need it.

FYI - our schedules look prettier than this - there’s more teal.

If ESOPs are on your mind, or you have questions generally around how they operate, please reach out.

AKL