ESOP Reporting: What happens when you don’t agree with your employer’s market value?

Get the lowdown on ESOP reporting and company shares at tax time, and what to do if you don’t agree with your company’s valuation.

Employee Stock Ownership Plans, or ESOPs, are a great way to build employee wealth as the business itself grows – but what happens when employees don’t agree with their company’s valuation?

Offering ESOPs to employees is a wealth creation strategy that’s available to all companies, regardless of whether they are listed on the stock exchange or are a private company.

But anyone who owns shares must report the value of their stock in their tax return. This means knowing the market value of your company.

So how do employees measure the value of their stock and report their ESOPs at tax time?

In this article:

What are my employer’s ESOP obligations? 

Employers must disclose to employees the market value of the company’s relevant taxing points for their shares or options. 

This is done via an Employee Share Scheme statement, or ESS statement, which employers must provide to their employees by 14 July after the end of the financial year. In most cases,  this is included in the employee’s assessable income. 

Think of it like the (now redundant) group certificates. 

In most cases, these numbers are pre-filled into an employee’s tax return. 

This is because the market value of many ESOPs – especially with listed corporations – is available on your CommSec or NABtrade account.

But if you work for a small, or even a large, unlisted business, it’s not so easy to stress-test the numbers you’re given. This is especially true if you have 12-monthly taxing points through the years (very common for restricted stock units, or RSUs), each of which require a market valuation at each particular point in time.

So how do tech stocks deal with this?

As we all know, their valuations (and the methodologies used to support them) often chop and change in response to various conditions, one of which is rising interest rates across the global economy.

When it comes to what is assessable, the ATO legislation refers to “market value” – but some stakeholders will view “market value” differently to others.

Case in Point: Canva

Let’s take a look at one of Australia’s tech darlings of our generation, Canva. This is a company with 2,000 Australian employees, many of whom participate in their company’s ESOP.

Several key investors have written down the value of their shareholding in Canva in the past six months – one of which is US investment giant Franklin Templeton, who has reduced the carrying value of their Canva investment by 58.5 per cent.

And it’s not just this one investor who differs in valuation opinion, either. 

Three major investors with independent valuations all value the business in a range between US$16.6 billion and US$36 billion. 

That’s a big spread, considering US $20 billion is larger than the GDP of many countries.

The valuation gap (not even the valuation itself) still beats 78 countries…

We may never know how unlisted companies like Canva calculate their end figures because they can – and are allowed to – keep a lot of things behind closed doors, including their valuation process.

As for what other tech companies can put in their ESS statements as the market value for recently vested ESOP interests, this remains to be seen. 

Do employees benefit from a company being valued more or less?

In some cases, tech companies will want the market value of their business to be as high as possible. This results in a high (and ATO-friendly) tax point – tax which the company doesn’t have to pay. Their employees pay this tax on the discount-to-market value.

Employees naturally want to keep their dollars in their own back pocket, which means the lowest valid market valuation for the business is the better figure from the employee’s perspective. 

How can an individual value a company if they disagree with the way the company has been valued by directors?

In fairness, most companies make it clear on their ESS Statements that market value may be calculated differently to that of the company’s own methodology. 

So, what does this mean for employees facing this predicament?

They aren’t going to get their own independent valuation of the business – that’s too expensive, and in a way kind of pointless, seeing as there are various valuations staring them in the face, both in the news and on their ESS Statement.

If you’re an employee, that leaves you with two options. 

You could: 

  1. Accept the company’s valuation and cop the tax – even if it is potentially higher than what it could be.
  2. Take the risk of running with an alternative valuation, if you have sufficient support to back this valuation. 

Ultimately, it’s a self-assessment situation and you can choose your own adventure.

But be careful – if you choose a market value that’s, say, 60 per cent lower than what is disclosed on your pre-filled ESS statement, the risk is that the ATO will ask questions either immediately or further down the line.

When pre-fill doesn’t equal tax tables on the tax return, it’s the easiest ATO review of all time.

If there are only a few hundred bucks at stake, most employees won’t care and will cop the extra tax.

But if there are a few hundred thousand bucks on the line, employees should obtain financial advice to determine what to do.

Oh, and this issue won’t just be limited to companies like Canva – it will affect most, if not all, unlisted companies, both Australian-based and abroad.

As always, if you aren’t sure how ESOP’s may affect you or your business, or have any questions in general about your tax return, please reach out. 

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This article was updated on 17 May 2024.  It’s not…