Submission to amend the Australian government’s very odd approach to employee share plan taxation

The Australian government responded to universal concerns on their intention to tax employee equity plans up-front, announced on budget night, with an amended approach. These amendments result in an approach that can be described as still very odd.

Friday 12 June 2009 was the closing date for submissions to the Australian Treasury on the government’s proposed amendments to employee share plan taxation. The draft on which comments were sought was released just 7 days prior to the closing date for submissions(see HERE).

Guerdon Associates’ submission identified very significant adverse consequences of the proposed legislation.

The suggested taxation arrangements for employee share schemes makes traditional share option plans inconceivable. Yet they are an essential ingredient for facilitating economic growth. There are also consequences for the effectiveness of APRA proposed regulation for deposit taking and policy holding financial entities.

The draft regulation as proposed:

  • Will in effect kill off traditional share option plans. The absence of appropriate option plans will ensure that start up and high potential growth companies essential for the country’s economic growth do not attract local and migrant entrepreneurial and professional skills necessary for success
  • Does not support global and APRA initiatives to ensure stable maintenance of the financial system through the facilitation of long term equity holdings by “responsible persons”
  • Encourages short-termism and less than optimal corporate governance by insisting that cessation of employment be the trigger for tax, rather than the meeting of long term performance requirements and exercise of options
  • Discourages the use of salary- and fee-sacrifice share plans as a means of encouraging the alignment of key management personnel’s interests with shareholders. Non executive director acquisition of company shares via fee sacrifice will be untenable
  • Will lead to the creation of “solutions” to circumvent the restriction of the share scheme tax as proposed that will result in poor-performing key management personnel being paid as much as good- performing key management personnel in some situations
  • Requires the taxation of equity that is subject to holding locks to prevent sale. This is counter to encouraging shareholder alignment through stock ownership, using a mechanism that could allow clawback.

As it stands, the government’s proposed legislation will encourage more companies to consider loan backed share plans, and cash based phantom equity plans.

Our recommendations in the submission responding to the draft legislation included:

  1. Allowing tax deferral until a benefit is realised
  2. Within this allow salary or fee sacrifice for equity where holding locks prevent employees selling shares
  3. Remove cessation of employment as a taxing point for those in receipt of share scheme benefits subject to genuine forfeiture conditions
  4. Include tax withholding requirements for employees who receive benefits and relocate offshore with their existing employer during a tax year

Our submission can be viewed HERE.

© Guerdon Associates 2024
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