Guerdon Associates made a submission to the Treasury review of taxation “Australia’s Future Tax System”.  The review is chaired by Dr. Ken Henry, head of the Australian Treasury (see HERE).

While there are numerous areas of concern to us in ensuring that the country’s tax system does not discourage executive and board remuneration arrangements that best serve the needs of shareholders, we decided to focus the paper on resolving the unintended consequences of taxing all unvested employee equity at termination.

The current taxation of deferred equity (and other) payments at termination discourages the use of these instruments as executives and other key employees approach retirement.  The unintended consequence is that there are fewer controls to ensure management and key employees of Australia’s enterprises manage risk for sustainable long-term returns.  That is, on their departure from an enterprise, there is no method to maintain tax neutral pecuniary interests in outcomes from decisions and actions made by them while in employment. 

Given that a significant contributor to the world’s economic problems has been the absence of these controls, Guerdon Associates suggests taxation regulation amendments to time taxation of performance contingent employee benefits to coincide with payment of these benefits, rather than at termination of employment.

The resolution of this tax dilemma will not, of course, mean that all companies should adopt a “hold through retirement” executive remuneration policy.  Rather, such a policy would be best suited to companies that have very long term time horizons, high capital expenditure and/or high value fixed assets.  But it is these companies that constitute the bulk of Australia’s wealth and wealth potential among listed companies, and so, in our assessment, the resolution of this issue would be a positive contribution.

There are other issues we have not yet had the time to tackle.  One of these is the inherent bias of the tax system towards temporary executive imports, versus the return “home” of the country’s highly experienced and valued executive diaspora.  We have noted this before (see HERE and HERE). 

We will keep you posted.

Our submission can be viewed HERE.

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