What are the Tax Implications of Gifting Private Company Shares to an Employee?

Issuing shares in a private company is a popular way for businesses to raise funds or reward investors and employees. However, the process can be complex, especially for those who are new to it. In this article, we will explore how to issue shares in a private company in Australia and the rules and regulations that need to be followed. We will also discuss share gifting, which is a way of giving private company shares as a gift..

Issuing Shares in a Private Company in Australia

The process of issuing shares in a private company in Australia involves several steps. Here are the key points to keep in mind:

1. Determine the capital you want to raise
   Before issuing shares, it is essential to determine the amount of capital you require. The capital needed will depend on the business stage and what you intend to do with the funds.
2. Decide on the type of shares you want to issue
   Different types of shares can be issued, such as ordinary shares, preference shares, or redeemable shares. Each share type has its characteristics and benefits, so it is crucial to select the right share type for your company.
3. Obtain shareholder approval
   Shareholder approval is required to issue new shares. It can be done either through a general meeting or by written resolution.
4. Prepare a prospectus or disclosure document
   If you are issuing shares to the public, you will need to prepare a prospectus or disclosure document. The document should provide information about your business, the risks involved, and the shares’ terms.
5. Lodge the necessary forms with ASIC
   You will need to lodge the necessary forms with the Australian Securities and Investments Commission (ASIC), including the application for registration as a company and the statement of compliance.
6. Share Gifting
   Share gifting is a way of giving private company shares as a gift. It can be a tax-effective way to transfer wealth to family members or to reward employees. However, there are some rules and regulations that need to be followed.

Here are some things to keep in mind when gifting private company shares:

Employers are allowed to give $1,000 worth of shares to employees who earn less than $180,000 annually, without any taxation effect for either the employee or the employer. Although it is a good start, it is often not enough to attract and retain employees.

On the other hand, employees can contribute up to $5,000 per annum to an employee share plan pretax, similar to a salary sacrifice contribution to a superannuation fund. This is a more meaningful benefit, allowing employees to acquire shares in a tax-effective way. The previous government looked at increasing this limit, but this has not been confirmed yet.

If shares are sold to employees instead of gifted, the rules are strict on the conditions under which the shares can be sold. For instance, if a share is worth $100, it can be sold to an employee with a discount of up to 15%, which is $85 (but not less than that) to the market value of the shares. It is important to note that any discount will eventually be considered taxable income to the employee, although this can be deferred for up to 15 years under the current rules.

Dr Craig West

Founder & Chairman | Succession Plus

Dr Craig West is a strategic accountant who has over 20 years of experience advising business owners.

With a background as an accountant in practice and two master’s degrees, Craig formed a strong view that the majority of business owners (and often their advisers) were unprepared and unaware of the steps required to prepare for exit. He then designed and documented a unique 21-Step Business Succession and Exit Planning process to assist owners and their advisers in navigating this process.

Craig now acts as a strategic business and financial mentor for mid-market business owners. Craig has written four critically acclaimed books educating business owners on employee incentives, succession planning, asset protection, and exit strategies. Additionally, he has completed doctoral research on Employee Share Ownership Plans (ESOPs) for succession.

Craig is a Member of the Forbes Business Council where he leverages his extensive experience to contribute valuable insights on helping business leaders navigate the complexities of growing and exiting their businesses.

In April 2024, the Exit Planning Institute admitted Craig to the International Exit Planning Circle of Excellence.