As leading financial rags like the Financial Review struggle to fill 40-odd pages during the Christmas period, Annabel Hepworth reported in Tuesday’s AFR that a body known as the “Employee Ownership Group” has “called for federal tax reforms aimed at encouraging more employees to take part in [broad based employee share] schemes.”

The group has written to the federal tax review seeking extended tax breaks for such share schemes. Currently, employees are able to receive $1000 worth of shares annually (and then receive concessional capital gains tax on any capital growth). However, for share issues worth more than $1000, the scheme is able to be undertaken on a ‘tax-deferred’ basis. The Employee Ownership Group is seeking that tax only be imposed when the shares are eventually sold (rather than after ten years) and “any growth in the value of the shares taxed as capital rather than income.”

Of course, like most special interest bodies, the wishes of the Employee Ownership Group would benefit a few selected employees at the cost of all taxpayers. Even the current system of employee share ownership benefits some employees (by virtue of the corporate structure of their employer) over others. For example, employees who work for partnerships, not-for-profit organisations or tightly held private companies are not able to receive shares and therefore are effectively subsidising the share ownership of employees who work for companies likes BHP or National Australia Bank.

However, it is possible that such tax preferential shares schemes don’t really benefit employees at all (in the same manner that the “First Home Owner” grant does not actually benefit first home owners). If we are to assume that a reasonably efficient market for labour exists, employee share scheme tax breaks effectively allow publicly listed companies to lower their employee costs by paying staff in tax-effective shares, rather than cash.

Further, while employee share ownership is considered by many to be a mythical panacea of governance, the benefits are, in reality, minimal. For a start, holding a small parcel of shares is unlikely to motivate staff to any large degree. CEOs receive millions of dollars worth of equity but their performance in recent years has hardly been stellar. One suspects providing a junior accountant or sales manager with $10,000 worth of ANZ shares is unlikely to alter their behavior to any large extent.

In addition, from a risk perspective, it is not wise for employees to have not only their income, but a large proportion of their assets tied up with their employer. If that employer were to fail (like ABC Learning Centres or Babcock & Brown), the staff member would face not only a loss of income, but a large destruction of their net worth.

Employee share schemes may seem like a good idea, but in reality they lead to a distortion in the labour market and fail to benefit the intended recipients. But don’t expect to hear that from experts like the Employee Ownership Group.

Peter Fray

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