ESPP Tax in the US and Australia

ESPP (Employee Stock Purchase Plan) has become one common method of compensating employees nowadays. My employer offers this through Etrade. Since it is US based but I live in Australia, I discovered a subtle difference in calculating ESPP tax between these two countries, which may incur double tax if not handled correctly.

In the US, our ESPP plan is a Qualified Plan, meaning income taxes are deferred and only realized when the shares are sold. And, upon selling these shares, the difference between the Grant Date FMV and the Purchase Date FMV will be taxed as ordinary income. However, if you the hold the shares longer enough, only the amount of discount allotted in the plan (such as 15%) is reported as ordinary income. The remainder is classified as a long-term capital gain. Below is quoted from Introduction to Employee Stock Purchase Plans – ESPP:

ESPPs use holding periods that closely resemble those of other stock option plans. For qualified ESPPs, the stock that is not sold until at least a year after the purchase date and two years after the offering date will receive favorable tax treatment. Stock sales that meet these criteria are known as qualifying dispositions, while those that don't meet these criteria are labeled as disqualifying dispositions.

Qualifying Dispositions

Participants who meet the holding requirements for qualifying dispositions will realize two types of taxable income (or losses), but none of it is reported until the year of the sale. The amount of discount allotted in the plan (such as 15%) is reported as ordinary income. The remainder is classified as a long-term capital gain.

In comparison, in Australia, our ESPP is a Tax-deferred scheme, meaning the difference between the actual purchase price and the Purchase Date FMV will be taxed as ordinary income in the year of purchase. The remainder is considered a capital gain and get 50% discount of tax if you hold the shares for 1+ years:

The deferred taxing point for a share or stapled security is the earliest of the following:

• when there is no real risk of forfeiture and the scheme no longer genuinely restricts disposal of the share

…

To demonstrate the difference, let us assume the following:

• Grant Date FMV: $30.00
• Purchase Date FMV: $60.00
• Actual purchase price: $25.50 (15% off the lower of $60 and $30)
• Sell price (1 year later): $80.00

In the US:

• Taxing point: when you sell the shares
  • Ordinary income: ($30.00 - $25.50)
  • Capital gain: ($80.00 - $30.00)

In AU:

• Taxing point 1: when the you purchase the shares
  • Ordinary income: ($60.00 - $25.50)
• Taxing point 2: when the you sell the shares
  • Capital gain: ($80.00 - $60.00)

In the Etrade web portal, it automatically adjusts the Est. Cost Basis according to the rules of the US:

• Initially the cost basis is the purchase date FMV ($60).
• After you hold the shares for one year, the cost basis is changed to $30.

For Aussie tax residents, the thing needs to watch out is: when lodging tax income after selling ESPP shares, remember not to use the cost basis listed in the Etrade portal. Use the Purchase Date FMV instead. Otherwise, the difference between $60.00 and $30.00 will be taxed twice:

• It is firstly taxed upon the purchase as ordinary income, which is correct.
• It is taxed again as part of capital gain when the shares are sold, which is incorrect.

Disclaimer I'm not a financial adviser. The above information does not constitute personal financial advice.