Comments on: Tax changes hardly worthy of mass hysteria http://www.crikey.com.au/2009/05/21/tax-changes-hardly-worthy-of-mass-hysteria/ now with extra source Sun, 12 Feb 2012 02:48:10 +0000 hourly 1 http://wordpress.org/?v=3.2.1 By: andrew carter http://www.crikey.com.au/2009/05/21/tax-changes-hardly-worthy-of-mass-hysteria/#comment-27019 andrew carter Thu, 21 May 2009 05:19:52 +0000 http://www.crikey.com.au/?p=60179#comment-27019 Not sure you explained how the old system enabled executives to avoid paying tax on their employee shares. I agree the beneficiaries of these programs haven't been very good at disclosing the full amount of their employee shares - if they've reported them at all - but the problem centres around the non-disclosure or evasion, not the system. If capital gains on the sale of investment properties weren't disclosed, would you say the problem was caused by the 50% capital gains discount or by the people who don't disclose this income? Clearly this would be evasion and we would be calling for better disclosure, but not to change the substantive law. Forcing employers to report the recipients of share schemes in much the same way that salary and wages are reported would have made a great difference. Withholding by employers could also work. Taxing the share or option at grant is more generous than the existing system, the problem the business community has with the change is that it is completely impractical. It imposes a tax liability on an employee that can't be funded because the share or option is wrapped up in, typically, a 3 year vesting period. It can't be sold to fund the tax bill, and this is the fundamental problem with the new rules (not only can't it be sold, the option may never be earned if performance hurdles aren't met). Companies can't continue to grant options to their employees for fear they will burden them with a tax liability that can't be paid. This doesn't merely affect people with a $1m tax bill from their options, but mid-level managers who might have a $5k tax bill that puts them under enormous financial stress. Under the old rules, you will find that most execs would have deferred the tax bill until all the restrictions lifted as they simply couldn't afford to pay upfront. In this case, the entirety of their gain would have been taxed at their marginal rate (no capital gains discount) and no lower-tax rate benefit would have arisen. Execs wealthy enough to fund the tax bill under the old rules on grant would have obtained the benefit of the lower rate when they eventually sold their shares - but this practice will continue as this has now been supplanted as the new system. The excessive amount of shares given to some employees is largely a different issue to the design of the tax system. I'm all for sensible remuneration, but this isn't the right response. In your example with Alan Moss where you say he managed to pay tax at half his normal rate (due to the capital gains tax discount - and unless he has disclosed this information, you have made a massive assumption that even he could afford to pay the upfront tax), he would not pay a cent more under the new rules. In all likelihood, he would have paid more under the old rules. Not sure you explained how the old system enabled executives to avoid paying tax on their employee shares. I agree the beneficiaries of these programs haven’t been very good at disclosing the full amount of their employee shares - if they’ve reported them at all - but the problem centres around the non-disclosure or evasion, not the system. If capital gains on the sale of investment properties weren’t disclosed, would you say the problem was caused by the 50% capital gains discount or by the people who don’t disclose this income? Clearly this would be evasion and we would be calling for better disclosure, but not to change the substantive law.

Forcing employers to report the recipients of share schemes in much the same way that salary and wages are reported would have made a great difference. Withholding by employers could also work.

Taxing the share or option at grant is more generous than the existing system, the problem the business community has with the change is that it is completely impractical. It imposes a tax liability on an employee that can’t be funded because the share or option is wrapped up in, typically, a 3 year vesting period. It can’t be sold to fund the tax bill, and this is the fundamental problem with the new rules (not only can’t it be sold, the option may never be earned if performance hurdles aren’t met). Companies can’t continue to grant options to their employees for fear they will burden them with a tax liability that can’t be paid. This doesn’t merely affect people with a $1m tax bill from their options, but mid-level managers who might have a $5k tax bill that puts them under enormous financial stress.

Under the old rules, you will find that most execs would have deferred the tax bill until all the restrictions lifted as they simply couldn’t afford to pay upfront. In this case, the entirety of their gain would have been taxed at their marginal rate (no capital gains discount) and no lower-tax rate benefit would have arisen. Execs wealthy enough to fund the tax bill under the old rules on grant would have obtained the benefit of the lower rate when they eventually sold their shares - but this practice will continue as this has now been supplanted as the new system.

The excessive amount of shares given to some employees is largely a different issue to the design of the tax system. I’m all for sensible remuneration, but this isn’t the right response. In your example with Alan Moss where you say he managed to pay tax at half his normal rate (due to the capital gains tax discount - and unless he has disclosed this information, you have made a massive assumption that even he could afford to pay the upfront tax), he would not pay a cent more under the new rules. In all likelihood, he would have paid more under the old rules.

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