The hidden RSU tax trap: Australian tax on employee share schemes

Meet James. He’s an Australian tax resident working remotely from Melbourne for a successful UK technology company.

As part of his remuneration package, James received 5,000 Restricted Stock Units (RSUs) in the UK parent company. Like many employees, he saw the RSUs as an attractive opportunity to build long-term wealth.

What James didn’t realise was that receiving shares in an overseas company could create unexpected tax complications, particularly when Australian tax rules, UK tax rules and foreign currency movements converge.

How are RSUs taxed in Australia?

For Australian tax residents, RSUs provided through an Employee Share Scheme may be subject to tax when the relevant ESS taxing point occurs.

Depending on the scheme and the circumstances, this may be before the shares are sold. When the shares are subsequently sold, any resulting gain or loss may also have Capital Gains Tax (CGT) implications.

When the RSUs vested

Three years after receiving the grant, James’s RSUs vested.

At the time:

• James had 5,000 shares vested
• The share price was £20
• The total value was £100,000
• The exchange rate was £1 = AUD $1.95

For Australian tax purposes, the ESS income assessable to James totalled AUD $195,000.

However, the shares did not necessarily need to be sold for tax to become payable. Under Australia’s ESS rules, the value of the shares at the relevant taxing point can generally be included in the employee’s assessable income.

James was understandably surprised.

“But I haven't sold anything. Why am I already paying tax?”

This is a common misunderstanding with RSUs. Receiving shares and selling shares can be two separate stages from a tax perspective.

When the exchange rate changed

Confident in the company’s future, James decided to hold onto his shares.

A year later, the share price was still around £20. On the surface, nothing had changed except the exchange rate.

Previously, £1 had been worth AUD $1.95. A year later, it had fallen to AUD $1.70. When James eventually sold his shares, he therefore received approximately AUD $170,000.

Although the underlying share price had not changed, the Australian Dollar value of the shares had fallen because of the change in the exchange rate.

For Australian tax residents holding shares in overseas companies, this is an important distinction. Currency movements can affect the Australian Dollar value of an investment even when the underlying share price remains unchanged.

What happens when employment crosses borders?

James’s situation became more complicated because he had spent part of the relevant vesting period working in London.

The UK company had already withheld tax on part of his RSU benefit because some of the vesting period related to his UK employment duties.

This creates the possibility of the same benefit being taxable in both Australia and the UK.

Where employment duties are performed in both countries, the Australia UK tax treaty may need to be considered alongside each country’s domestic tax rules. The employee’s residency, where the employment was performed, and the way the RSUs were awarded can all be relevant.

Foreign tax credits may also be available where the requirements are met, potentially helping to reduce the impact of double taxation.

For someone in James’s position, reviewing the full employment and residency history can be just as important as reviewing the RSU grant itself.

Bringing the Australian and UK tax position together

At this stage, James needed to consider two separate aspects of his RSU tax position:

• The ESS taxation at the relevant taxing point
• The CGT implications when the shares were eventually sold

He also needed to consider how his UK employment periods affected the RSU benefit and whether the UK tax already withheld could be taken into account in Australia.

Reviewing the original RSU grant documents, vesting dates, applicable exchange rates, employment periods and tax reporting can help establish the correct position and ensure the records needed for future CGT calculations are available.

For cross-border RSUs, considering the Australian and UK tax positions together can be particularly important. Seeking Australian cross-border tax advice can help you understand how the different tax rules interact and whether foreign tax credits may be available.

Why planning matters

If you’re an Australian tax resident holding RSUs in a UK company, the tax implications can extend well beyond the relevant ESS taxing point.

Depending on your circumstances, you may need to consider:

• ESS taxation
• Foreign currency movements
• Capital Gains Tax
• UK payroll obligations
• International mobility
• Double taxation risks
• Foreign tax credit claims
• Record keeping for future share disposals

Understanding these issues before your shares vest or are sold can help you establish the correct tax treatment and avoid unexpected reporting problems.

For Australian tax residents with international employee share schemes, professional advice can also help bring the different elements together, particularly where employment, residency and tax obligations span more than one country.

At Sable International Tax, our Australian and UK tax specialists work together to help clients understand how their cross-border circumstances affect their overall tax position. Because when your remuneration crosses borders, your tax considerations do too.

Disclaimer: The following example is for illustrative purposes only.

Need help navigating your RSU tax obligations? Speak to our Australian cross-border tax specialists for personalised advice. Contact Sable International Tax Australia by email at [email protected] or call +61 3 8651 4501.