When it comes to executive remuneration-related matters, the Federal budget handed down by the Treasurer on Tuesday 13 May is notable more for what it did not do than for what it did. In particular, the budget did not fix the tax treatment applying to employee share schemes that is making life so difficult for high technology, start-up, and small explorer companies. Prior to the budget being presented there were intimations that this would be the case, with the government choosing to bundle the bad news in the budget and then work to release changes, such as share scheme taxation reforms, at a later time as one of a string of positive initiatives to demonstrate “Australia is open for business”. The latest advice from Treasury is that issues raised in submissions to this consultation process are being considered within the context of the Prime Minister’s Taskforce established to develop a National Industry Investment and Competitiveness Agenda, which is due to make recommendations to the Government by mid 2014. Information about the Taskforce is provided in the Prime Minister’s media release of 18 December 2013 (see HERE).
Budget measures impacting executive and director remuneration are noted below.
Hike in the top marginal tax rate
The main Budget measure to impact director and executive remuneration is the 2% ‘Temporary Budget Repair Levy’ that will lift the current 45% top marginal tax rate plus the 1.5% Medicare levy and the 0.5% National Disability Insurance Scheme levy from a total of 47% to 49% on individuals’ taxable income over $180,000 pa from 1 July 2014 to 30 June 2017, assuming the Government can get this measure through the Parliament.
While the impact on take home cash is marginal, boards may want to consider the effective increase in the marginal tax rate as an opportunity to negotiate a change in the way their executives are paid. For example, while STI deferral is preferred by investors and many boards as an excessive risk mitigator, it is often resisted by management who do not want to receive less take-home cash in the year of implementation. The effective marginal and temporary marginal tax rate increase may encourage management acceptance of some deferral. Likewise, some boards and executives may better countenance the prospect of a greater proportion of pay being deferred as LTI. For others, there is the prospect of more radical changes to remuneration for more effective deferral. Currently many board directors and executives concede that long-term incentives are, for many, impractical, not motivating and not cost effective. An example would be highly capital-intensive industries, such as mining, whereby the internal rate of return for investment and subsequent growth is measured over decades, rather than the 3 or 4 years of a traditional LTI. An alternative would be to replace LTI with service- and then time- contingent equity as part of fixed pay, vesting over a much longer term which in effect is a deferred part of fixed pay.
The temporary increase in income tax may encourage executives to accept giving up some cash STI, LTI, and cash salary, for deferred equity that vests when marginal tax rates are at lower levels. Boards will be happier that executives have “skin in the game” for alignment with long term shareholder interests and the nature of investment cycle, as well as an incentive to remain with the company over the longer term, for less overall expense.
Fringe benefits tax
To maintain “integrity and fairness in the tax system”, a number of other tax rates that are curently based on the top personal tax rate will also be increased. With the exception of the Fringe Benefits Tax (FBT) rate, these tax rates will be increased for the same period that the Temporary Budget Repair Levey is in place.
To prevent taxpayers from using fringe benefits to avoid the levy, the FBT rate will be increased from 47% to 49% from 1 April 2015 until 31 March 2017 to align with the FBT income year. The cash value of benefits received by employees of public benevolent institutions and health promotion charities, public and not-for-profit hospitals, public ambulance services and certain other tax-exempt entities will be protected by increasing the annual FBT caps. In addition, the fringe benefits rebate rate will be aligned with the FBT rate from 1 April 2015.
The nine-month difference in timing of the increase in the marginal income tax rate and the FBT rate will present arbitrage opportunities for individuals who have flexibility in their remuneration packaging.
Fairer treatment for superannuation contributions in excess of the non-concessional contributions cap may benefit board directors
As a result of the budget, individuals will be allowed the option of withdrawing superannuation contributions in excess of the non-concessional contributions cap made from 1 July 2013 and any associated earnings, with these earnings to be taxed at the individual’s marginal tax rate.
This change may benefit many directors. Currently directors have no choice but to have superannuation contributions made on the fees they receive. If they sit on multiple boards these contributions may exceed the allowable contributions cap. Beyond this cap excess contributions have been punitively taxed.
We note that CAMAC will be abolished. CAMAC has, over the years, reviewed many remuneration reporting and legal issues (for example, see HERE, HERE, and HERE). Not many of their recommendations have been implemented.
The implications of the budget for executive and director remuneration are moderate, and in most cases will not impact the way payment is received or managed. The longed-for repair of share scheme taxation has, we understand, been deferred for political reasons. However, these changes, when they come, will most likely have considerably more impact on executive and director remuneration frameworks, alignment and governance.© Guerdon Associates 2023 Back to all articles