Restricted stock units (RSUs) are offered by a company to their employers. They are awarded as compensation for an employee’s performance or as a reward for the employee’s time in the company.
The employee does not own the RSU until the end of a vesting period. Prior to vesting, the RSUs are mere promise and do not provide the employee with any voting rights. You can choose to sell or hold the RSUs as soon as they become vested. To ensure the employee stays with the company, the vesting period may last years. The RSUs may be distributed under the vesting period according to a distribution schedule. For example, 1/5th of the total stocks may be distributed every year for five years. If the employer leaves the company in the fourth year, he or she will forgo 1/5th of the stocks that were bound to be vested in the fifth year. This gives an employee further incentive to stay with the company and perform well.
RSUs vs. Stock Options
RSUs must be distinguished from a stock option. A stock option is also a form of compensation given by a company to its employees. RSUs are a grant of actual stocks. As the company performs well, the employee benefits as well. In contrast, a stock option is an option to purchase a stock at a certain time and price. An employee may not even exercise a stock option or, if the company is bankrupt or liquidated, they may not be able to exercise their option.
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Taxes
Income Tax
Once they are vested, the RSUs are considered an income for the employee. RSUs are valued at the market price of a stock for the company. The employee is required to record the income in their tax forms and pay an income tax on the RSU. Notably, it is possible that the income from the RSUs may push you into the next bracket for income tax which will increase your increase marginal income tax rate. In order to avoid the employee paying the tax from their personal funds, companies may withhold some stocks to cover the taxes.
In Australia, RSUs may be granted under the Employee Share Scheme (ESS). The ESS is a way for the employer to provide benefits to their employee through the grant of stocks. If RSUs are granted under the ESS, they are governed by the ATO rules on ESS. More information about the ESS can be found on ATO’s website here.
Capital Gains Tax
Capital gains tax is paid on RSUs when they are vested and eventually sold by the employee. In Australia, the capital gains tax is 30%. There are various exemptions and concession that may apply to the capital gains tax. Exemptions may be made, for example, based on how long the RSUs were held by the employee. For more information, you can refer to our comprehensive guide ‘What is a Capital Gains Tax?’. Alternatively, you can get a free quote from a Taxation Lawyer who can assist you with the tax requirements.
It is not difficult to sell RSUs as most companies that offer them have publicly traded shares on the share market. It may not be a wise decision to hold RSUs. The future of the employing company is uncertain and it may be better to sell a majority of the stocks to ensure compensation now. RSUs became a popular form of compensation because many employees suffered a severe loss when they were unable to exercise their stock options as companies became bankrupt during the 2008 financial crisis. Selfing RSUs will also prevent a loss when the value of the company’s stock decreases. The employee can then use the profit to create a more diversified portfolio which will prevent an overexposure in the company or the company’s sector.
