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Accounting

What happens to my employee share scheme in a property settlement?

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Whether your share interests are “property” or a “financial resource” will usually, but not always, determine whether they can be included in a property settlement order.

Introduction

Over the last 20 years, if not longer, employee share schemes have become a common means by which employers incentivise their Australian employees. The obvious corollary to this is the increasing prevalence of share scheme interests, in all their forms and guises, being included in property settlements under the Family Law Act 1975 (Cth).

How share schemes are treated in property settlements has developed in recent history. The decision in Eakins & Higgins (2021) FamCA 330 underscores how share schemes are presently dealt with by the Family Court.

Introduction

Employee share schemes and property settlements, generally

When it becomes known that a spouse in a property settlement has been granted interests under an employee share scheme, quickly ensuing is the usual debate as to whether those interests are property or a financial resource for the purposes of the Family Law Act.

The importance of this distinction being that property to the relationship can be subject to an alteration of property order by the Family Court. Whereas a financial resource can only be taken into account by the Family Court when considering if the division of assets is just and equitable.  In short, if the share scheme interest is considered property it will be included in the relationship’s balance sheet, if it’s considered a financial resource it will be excluded.

In this respect, the following principles regarding employee share schemes have been formed by the Family Court:

  • vested shares scheme interests are usually viewed as property to the relationship, this is also the case if vesting occurs post separation.
  • options that have vested but have not been exercised are also viewed as property, but will only have an intrinsic value if they are “in the money”; and,
  • granted but unvested share scheme interests are usually, but not always, viewed as a financial resource, particularly where there are performance hurdles.

One only needs to consider the case of Eakins & Higgins to see how these principles are presently applied by the Family Court.

Eakins & Higgins

In Eakins and Higgins a significant proportion of the assets of the matrimonial balance sheet came into existence post separation yet before finalisation of the divorce. These assets were employee share scheme interests of Mr Higgins and amounted to in excess of $650,000.

In respect of Mr Higgins’ share scheme interests, the Family Court determined that Mr Higgins’ shares which vested post separation were included in the asset pool for division, notwithstanding that 6 years had passed since the time of separation.

Further, the share entitlements of Mr Higgins which were scheduled to vest 8 months after the date of the Family Court order were also included as property in the asset pool, notwithstanding the principle that unvested interests should generally only be treated as financial resources.

Lastly, other unvested share scheme interests of Mr Higgins were excluded from the matrimonial balance sheet as their vesting was not assured, consistent with Family Court precedents, citing dependence on company’s financial and share price performance.

With the inclusion of the above share interests of Mr Higgins in the asset pool for division, the Family Court ordered that Mr Higgins receive a 38% entitlement and Ms Eakins a 62% entitlement to the net asset pool, in recognition of Ms Eakins contributions as sole career of their children and on account of her future needs regarding same.

Taxation of employee share schemes in a property settlement
Eakins & Higgins

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About the Author

Dean Crossingham

Dean is an Accountant and Tax Adviser who provides specialist tax services in relationship separation and divorce matters.

He provides expert guidance in navigating the tax consequences of a relationship breakdown. This includes expert tax advice on the division of relationship assets, property settlement tax structuring and negotiation support as well as ongoing accounting and tax services post property settlement.

Dean Crossingham