The federal budget fixes or alleviates many remuneration complexities and anomalies. It also changes superannuation rules again.

We have no doubt boards will be receiving a lot of information from management as to how remuneration should change as a result. But, despite “simplification”, nothing is as simple as it seems.

While we give you a summary in this article, future newsletters will highlight issues and opportunities in more depth. Proposed budget changes impacting executive and director remuneration, include:

• Superannuation and eligible termination payments;
• Stapled securities; and
• Fringe benefits tax and marginal income tax rates.

Superannuation:

The 2006/07 Federal Budget proposes dramatic changes to superannuation from 1 July 2007. This time the aim of simplification was largely achieved without too much pain and potentially a lot of gain. In respect of contributions, important initiatives include:

• abolition of age-based limits for all deductible superannuation contributions;
• concessional deductible contributions subject to an effective annual ceiling of $50,000 per person per annum to age 75 (transitional rules will apply for employees aged over 50);
• deductible contributions exceeding $50,000 will be taxed at the highest marginal rate;
• undeducted contributions will be subject to an annual limit of $150,000 (transitional rules are still to be considered);
• employer ETPs cannot be rolled over.

From the benefits perspective:

• Reasonable Benefit Limits will be abolished;
• benefits paid from a taxed fund to retirees from age 60 or above (either as a lump sum or pension) will be tax-free;
• members who have reached preservation age may establish pension income streams or leave money within superannuation indefinitely and draw on it at their discretion (compulsory withdrawal abolished).

At the most senior executive levels there are a number of immediate implications:

• Tax effective salary sacrificing for superannuation will be limited to $50,000, and for the next five years for anyone over 50, $100,000. So many executives planning a late run to top up their superannuation now have this alternative blocked.
• There may be opportunities for executives in defined benefit plans for their benefits to be greatly enhanced. However, we advise companies to wait for the fine print, as the exact treatment of these benefits has yet to be detailed. The effective age based contribution limits are averaged over all plan members, possibly allowing some executive members to enhance their tax free benefits. This could also make sense if the plan is in surplus, and so not impact the company’s immediate cash flow. But to reiterate – be careful and wait for the detail.

Employee Share Schemes – Stapled Securities:

Currently employees participating in an employee share scheme can choose the “tax-deferred” or the “tax upfront” concession on any discount they receive from acquiring shares or rights below the market value, subject to certain conditions. One condition is that shares must be ordinary shares, and rights must be rights to acquire ordinary shares.

These concessions do not apply to stapled securities that are created when an ordinary share and another security, such as a unit in a unit trust, are bound together so they cannot be sold separately. Stapled securities have been used extensively by the property investment industry when merging management and investment operations together. Options over stapled securities were not included in Division 13A of the Income Tax Assessment Act for beneficial tax treatment as an employee share plan. So most of these companies now use loan backed share plans.

From 1/7/2006, the employee share scheme and related CGT provisions will be extended to stapled securities that include an ordinary share and are listed on the ASX.

FBT and Marginal Income Tax Rates:

FBT and marginal income tax rates have been reduced and/or have new income thresholds. Specifically:

• The FBT rate will be reduced from 48.5% to 46.5% with effect from 1 April 2006;
• In-house FBT tax-free threshold will be increased from $500 to $1,000 with effect from 1/4/2007;
• Minor benefits threshold increased from $100 to $300 with effect from 1/4/2007.

The new tax rates and thresholds are depicted in table 1 below.

These new rates have only marginal impact on most senior executive remuneration, and should not be a driver of any change to remuneration strategies at this level. While the administrative burden has decreased, and the effective benefit can be considered of value by many non executive employees, we believe most companies and boards would be better placed to concentrate their energies on more substantive governance and strategic issues in regard to reward for the senior executive group.

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