What are Phantom Shares?
A Phantom Share Agreement is a contractual agreement between a corporation and recipients of “phantom shares”, which are hypothetical units that mimic the price of the company stock.
A Phantom Share bestows upon the employee (grantee) the right of a future cash payment which will be paid at a designated time or in association with a designated event in the future. The payment will be an amount tied to the market value of an equivalent number of shares of the corporation’s stock.
- The amount of the payout will increase as the stock price rises, and decrease if the stock falls, but without the recipient actually receiving any stock.
- Phantom shares are often used as a form of a cash bonus plan, to incentivise and/or reward employees. Some plans pay out the benefits in the form of shares.
- Phantom shares can, but usually do not, pay dividends.
- When the grant is initially made, there is no tax impact until a payout is made. This means that for payroll purposes, phantom shares are only relevant when the payouts are made.
- Certain types of Phantom Share Agreements can require “vesting” of the shares in the employee.
Phantom Share Payouts
Phantom Share Payouts are cash payments made to employees in line with the pre-agreed payout terms of the Phantom Share Agreement.
- Payouts can be made on any terms and conditions as agreed to between the parties such as achievement of a predetermined goal, the passage of time or completion of employment-related terms.
- Payouts are taxed as ordinary income at the time of payment.
- Payouts will be subject to CPF in certain circumstances, discussed below.
Tax Implications of Phantom Share Payouts
Income Tax
Usually, the employee is taxed when the payout is made, with the full payout being taxed as ordinary income to the employee. These payouts are seen as a form of bonus and are reported as such in the employee’s IR8A.
Phantom shares can also be taxable on vesting, even if not paid out. If the value of the phantom shares is pegged to shares that have value (ie. value is transferred to the employee).
CPF
In certain instances, Phantom Share Payouts will be subject to CPF:
- CPF contributions are payable on the cash proceeds/payouts given to the employee if the shares are held in the name of the employer.
- CPF contributions are not payable on the cash proceeds/payouts if the shares are held in the employee’s name.
In addition to this, foreign workers do not contribute to CPF and will not have a CPF payment due on Phantom Share Payouts they receive.
Accounting for Phantom Share Payouts on SimplePay
SimplePay does not currently have a preset system item to cater for Phantom Share Payouts but the desired result can be easily achieved with a custom item.
More information about custom items can be found here.
There are two different options depending on whether the phantom shares are registered in the name of the employer or the employee:
Employer
The annual bonus item on the SimplePay system acts as a form of Additional Wage and will also be taxed as income.
As noted above, payouts from the Phantom Share Agreement are taxable as ordinary income if the shares are registered in the employer’s name. Also, the payout attracts CPF and forms part of the CPF calculation as additional wage (AW).
The following steps can be taken to have it added as a custom item:
- Click on Settings > Custom Items
- Click on Add and select Income
- For the IR8A Category select Bonus in the drop-down menu
- The CPF Type will be seen as Additional Wage (AW)
Employee / Foreign Worker
In cases where the shares are held in the name of the employee or where the employee is a foreign worker, the payouts are not subject to CPF and will not form part of payroll calculations in SG.
The payments will still be subject to other tax (Income, etc.) and must still be reflected on the payroll of the employer. Phantom Share payouts should be reported under the ‘bonus’ section of the IR8A.
The system provides the ability to create a custom bonus income item which is not subject to CPF.
The following steps can be taken to have it added as a custom item:
- Click on Settings > Custom Items
- Click on Add and select Income
- For the IR8A Category select Bonus in the drop-down menu
- The employee will not contribute towards CPF as it is not applicable to a foreign worker.