In case there were any doubts that the Federal Government will never let good policy get in the way of an opinion poll, Assistant Treasurer, Chris Bowen, announced yesterday that the proposed changes to the taxation of employee share schemes will be reviewed. In a statement, Bowen noted that, “given the community concerns with the proposed changes and the possible unintended adverse impacts on employee share scheme arrangements for ordinary employees, the Government will be fast-tracking the consultation process.”
While the consultation process will not ensure that employee share schemes regain all the elements of the existing tax benefits, pressure from unions, business lobby groups and media have led to the near certain result that the proposed changes will amended in the coming months.
Despite the apparent outrage, there are actually many more winners from the proposed changes to the way employee share schemes are taxed than losers. The problem is, the losers have much more to lose and are unsurprisingly, far more vocal than the silent majority of taxpayers.
Winners: The main beneficiary from the changes are Australian taxpayers and workers who aren’t able to benefit from employee share schemes. Anyone who works at a small business, partnership, private company or not-for-profit organisation has limited or no access to employee share schemes and therefore do not benefit from the tax concessions offered to scheme participants.
Losers: The biggest losers from the changes are senior executives at public companies who would no longer be able to defer tax until the shares are sold (or options are exercised). Executives such as Macquarie’s Allan Moss and Nick Moore or Qantas’ Geoff Dixon received tens of millions of dollars of shares as remuneration and were able to defer tax on those payments for upwards of five years (had they received cash, they would have been obligated to pay tax at the time of payment). As anyone with a cursory knowledge of finance would attest, deferral of a payment has value — by using share schemes and options plans, that time value is transferred from Australian taxpayers to millionaire executives.
Other losers from the proposed changes are the sizable proposition of executives who simply do not disclose equity grants in their tax returns and have been able to evade their taxation obligations. An ATO audit found that 8% of more than 1,300 executives audited failed to disclose an average of $180,000 in share scheme benefits. (Tax records are only required to be retained for five years, whereas many employee equity instruments will not be exercised for an even longer period). This blatant tax evasion from Australia’s corporate elite would be prevented by equity recipients being forced to pay tax at grant, rather than at exercise or sale (admittedly, there are other means of preventing such evasion, such as the operation of a withholding tax regime, or compulsory reporting by companies).
Other losers include lawyers, accountants and human resource staff who benefit financial from the employee share scheme industry which has evolved in recent years. These mostly high-paid workers and firms often paid hundreds of dollars an hour, profit from additional complexity involved in equity schemes.
The widespread panic, which has led to numerous large companies suspending or freezing their employee share schemes is little more than an attempt to blackmail the Federal Government into retaining the current rules which so favour executives. According to Computershare, 95% of its ASX100 clients have suspended share schemes, including Macquarie Group, Wesfarmers, Woolworths, Fairfax Media, OneSteel.
Of course, there is utterly no reason for companies to suspend these schemes. Participation in employee share schemes is not compulsory for staff. If employees would rather not pay tax on the “accounting value” of the equity instrument up-front, they can simply elect to not participate in the scheme, Suspending or freezing scheme is a completely unnecessary move aimed purely at gaining popular support for a policy which predominantly benefits wealthy executives.
Meanwhile, the AFR on Saturday dutifully reported the views of Corporate Tax Association head, Frank Drenth, who claimed Government budget forecasts of a $200 million revenue gain were wrong, with the changes allegedly costing the Commonwealth revenue. The AFR neglected to mention that the legitimate sounding Corporate Tax Association is little more than a lobby group for Australia’s largest companies. The very companies which have the most to lose from the proposed share scheme changes. As for Drenth’s calculations, they are based on a share price growth rate of 27 percent for the hypothetical company and completely ignore the ‘time value of money’ that the Commonwealth benefits from the up-front tax payment — in short, they are completely wrong.
Critics of the proposed law changes, including executives, public companies, media and unions fail to understand the utter inequality of a small, select class of employee benefiting at the expense of the silent majority of taxpayers. It is no surprise that the most vocal opponents of the changes are wealthy executives and their paid lobbyists who have the most to lose from the proposal.
The Government’s decision to setup a “consultative process” to water-down the proposed laws is further evidence that Rudd and co. are more interested in looking good, than doing good.