Australian Taxation Office taking a close interest in executive remuneration arrangements

During a recent address to the Australian Institute of Company Directors,
The Australian Commissioner of Taxation, Mr Michael D’Ascenzo, confirmed that the ATO had proceeded with its previously conveyed intention to review the tax affairs of high-income individuals with remuneration in excess of $1 million.  The focus of the review includes incentive arrangements involving shares, options and rights, cash bonuses and non-income capital benefits. 

The stated purpose of the initiative is to improve the ATO’s understanding of the arrangements, identify risks and develop strategies in response to the risks.

The Commissioner indicated that initial assessment suggested that employee share plans were a potential risk.  As a consequence, the ATO examined 1,914 public companies (including the top 300 companies), 160 of which were identified as having employee share plans.  As at 30 June 2007, 601 individuals among the top 5 highest paid executives within those 160 companies were identified as having a possible taxing point under a share plan.  216 individuals within this group have potential discrepancies relating to a cessation time, some over multiple years.

The ATO has sent individual questionnaires to a test pool of 30 individuals seeking clarification, and more are to follow.

Shares, rights and options provided by the employer as part of the remuneration package are income assessable to the individual executive or employee.  If the arrangement uses ‘qualifying shares’ or ‘qualifying rights’ (including options), the individual can elect to include the value of the shares or rights in his or her tax return for the tax year in which they were granted or defer tax until the ‘cessation time’.  In broad terms, the ‘cessation time’ will be the earliest of the date employment ceases, shares or rights are disposed of, rights are exercised, any disposal restrictions or forfeiture conditions are removed or 10 years after the grant date.

If the employee chooses to have the shares, rights or options granted to an associate such as their super fund or family trust, the value is still included in their remuneration package and must be included in their next tax return.

Our experience suggests that many executives and employees participating in equity plans of various forms have a poor understanding of the tax consequences.  Although it would be unwise for companies to provide specific taxation advice to individuals, there is a need to consider strategies to properly alert participating employees to the importance of obtaining tax guidance from professionally qualified advisers.

Other recent reports indicate that the ATO is widening its focus under the 2007-2008 compliance program to include high income executives in private companies as well as large listed companies.  The ATO has also signalled its intention to closely review the taxation compliance of aging “baby-boomers” moving to dispose of businesses ahead of retirement, and of others who sold shares or property to move substantial sums of money into superannuation before the closing of the special contribution window on 30 June 2007. 

See Mr Michael D’Ascenzo’s speech HERE.

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