By Harry Moustakas , Managing Director and Senior Financial Adviser at Navigate Advisory
Restricted Stock Units – RSUs – are a type of Employee Share Scheme that you’ll likely encounter if you work in the tech world. Put simply, they’re company shares that are promised to you but come with strings attached.
Not to be confused with Share Options, which is another type of employee share scheme where the company gives you the right to purchase company shares at a predetermined price within a specific timeframe.
Originally an American concept used by major listed companies like Google, Microsoft and Apple, RSUs are now being adopted by Australian startups and scale-ups with ambitious growth plans to attract and retain top talent in a competitive market.
The two questions I get asked most often about RSUs are:
- Should I sell some of my shares when they vest?
- Should I sell them all and pay down my home loan?
Before we explore these different options, let’s first understand exactly how RSUs work and what you need to be aware of…
How RSUs Work
RSUs are often called “golden handcuffs” because they’re designed to keep you at the company.
When you’re granted RSUs, you don’t immediately own the shares. Instead, you receive a promise that you’ll get the shares once certain conditions are met – usually staying with the company for a specified period.
Most RSU arrangements vest over three years, though this can vary. A typical vesting schedule might look like this:
- Year 1: 33% of your RSUs vest
- Year 2: 33% vest
- Year 3: 34% vest
Until the shares vest, you don’t own them. You can’t sell them, you don’t receive dividends, and you have no voting rights. They’re essentially a promise of future compensation tied to your continued employment.
Key Things to Be Aware of with RSUs
Tax Treatment at Vesting:
- RSUs are taxed as ordinary income when they vest, based on the market value of the shares on the vesting date.
- Your company doesn’t withhold tax on vested RSUs like they do for regular salary – you’re responsible for paying this tax.
- The vested amount is added to your taxable income, potentially pushing you into a higher tax bracket.
- Any subsequent growth in share value is subject to capital gains tax when you sell.
Diversification Risk:
- Having a significant portion of your wealth tied to your employer’s stock creates concentration risk.
- Your salary and investment portfolio both depend on the same company’s performance.
- If the company faces difficulties, both your job security and investment value could be affected simultaneously.
- This goes against fundamental diversification principles for building wealth.
Cash Flow Impact:
- You face a tax bill on shares you may not have sold yet
- Many executives discover they owe tens of thousands in tax without having the cash available
- This often comes as a shock when completing annual tax returns
Let me illustrate with an example
You’re earning $200,000 in base salary, and $80,000 worth of RSUs vest in a financial year.
Your taxable income just jumped to $280,000.
If you’re in the top tax bracket, that’s an additional $36,800 in tax you need to find the money to pay – except you haven’t received any cash, just shares.
Your Options When RSUs Vest
When RSUs vest, you essentially have three choices to consider:
Option 1: Keep them all (don’t sell)
- You maintain full exposure to your company’s potential growth
- No immediate capital gains tax implications
- You still need to find cash elsewhere to pay the income tax on the vested amount
- Concentration risk remains high
Option 2: Sell some to pay the tax
- Covers your immediate tax obligations
- Reduces concentration risk somewhat
- You keep partial exposure to company growth
- May trigger capital gains tax on the portion sold (though often minimal if sold immediately after vesting)
Option 3: Sell all vested shares
- Eliminates concentration risk entirely
- Provides cash to pay tax and potentially other financial goals
- You lose any future upside from your company’s share price growth
- Gives you flexibility to diversify into other investments
A Strategy to Consider
For most clients in this situation, I often discuss the merits of the third option – selling all vested RSUs immediately. Before you think this is overly conservative, let me explain the logic:
First priority: Pay the tax bill. This eliminates any risk of penalty interest from the ATO.
Second: Pay down your home loan. This reduces non-deductible debt and improves your cash flow.
Third: Split your home loan. Separate the portion you’re about to redraw for investment purposes.
Fourth: Use the redraw facility to purchase diversified ETFs. This gives you exposure to hundreds of companies globally rather than being concentrated in your employer’s stock.
The benefits of this approach are:
- Tax obligations are covered immediately
- Non-deductible debt (your home loan) is reduced
- The debt you take on to invest becomes tax-deductible
- Your investment portfolio becomes properly diversified
- You maintain similar equity exposure but with much less concentration risk
Planning Ahead
I recommend proactively looking at your employee share scheme and vesting schedule to determine if you’ll have vested shares in the next tax year and plan for it.
If you know RSUs are vesting next year, start setting aside money now to cover the tax bill. As a rough guide, if you’re earning over $180,000, expect to pay around 47% tax (including Medicare levy) on the value of vested shares.
The Bottom Line On RSUs
Your RSUs can be incredibly valuable, but only if you understand how to manage them properly within your broader financial strategy.
Whether you’re planning for early retirement, helping children with property deposits, or building long-term financial security, your RSUs need active management rather than just hoping your company’s share price keeps rising.
When you understand the tax implications, plan for the cash flow impact, and implement proper diversification strategies, your RSU compensation becomes a powerful component of Your Great Life – both now and in the future.
Because when your whole financial world makes sense – including how you handle your equity compensation – you gain the power to say ‘yes’ to bold life choices.
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Book an introductory chat at navigateadvisory.com.au/contact/
Navigate Advisory has offices in Balmain, Brighton-Le-Sands and Hurlstone Park.
Any advice provided in this article is general advice only and does not take into account the objectives, financial situation or needs of any particular person. It does not represent legal, tax, or personal advice and should not be relied on as such. You should obtain financial advice relevant to your circumstances before making any decisions.her to find solutions that work for your entire family.