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Alan
87 Posts |
 Posted - 20 Mar 2006 : 10:01:38
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Dear All
With regulatory reform for employee share ownership again under consideration by Government in the taxation and corporations law areas, it is useful to have a look once again at what has been proposed in the past and what the policy positions are presently of the ESOP advocacy groups on these matters.
The AEOA's positions have been consistent since the time the Australian Parliament's "Economic and Employment Committee" investigated these matters in the late 1990's and which were comprehensively detailed in their report "Shared Endeavours" released in 2000. This report is also known as "The Nelson Report" after the MP who chaired the investigative Committee, Dr Brendan Nelson.
The AEOA's policy position can be seen on this web-site under "AEOA Policy" at: http://www.aeoa.org.au/0024/default.asp?id=16.
The "Nelson Report" can also be accessed on the AEOA web-site at:
http://www.aeoa.org.au/0024/default.asp?id=17.
For a recent, broader but nevertheless complementary view to the above on ESOP Reform, you can see the policies detailed in the report "Employee Share Ownership in Australia: The Future" by the Employee Ownership Group. You can access this policy report at:
http://www.eogroup.org/default.asp?id=14
Further discussion, comments, ideas and proposals on ESOP regulatory reform would be welcomed. We need to keep the reform agenda bubbling along.
Alan Greig
Public Officer
AEOA
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admin
632 Posts |
Posted - 12 Feb 2008 : 02:38:38
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ESOP Regulatory Reform for SMEs
The Employee Share Ownership Project at Melbourne Law School is currently researching the regulatory and other barriers to the development of employee share ownership in SME’s.
The Law School will be having a workshop in early April, 2008 where experts will consider the topic “Employee Share Ownership in SME’s: Objectives, Current Practice and Regulatory Reform”. You can see more on this research project at:
http://cclsr.law.unimelb.edu.au/go/centre-activities/research/employee-share-ownership-plans-current-practice-and-regulatory-reform/index.cfm
SMEs in Australia are much less likely to have broad-based employee share ownership plans than their larger, listed counterparts. The low incidence of employee share ownership in the SME sector is attributable in part to the current regulatory regime in corporate and taxation law. The current ‘one-size fits all’ approach is ill-suited to serving the diverse objectives for which SMEs may seek to implement employee share ownership and, in many cases, operates to effectively deny SMEs equal access to employee share ownership plans.
This workshop will discuss the diversity of objectives for which SME owners and managers may seek to implement employee share ownership plans (ESOPs); and how the current regulatory regime in corporate and taxation law structures and constrains the use of ESOPs in this sector. The case for introducing regulatory reforms to remove identified constraints and discuss practical proposals for reform will be considered.
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admin
632 Posts |
Posted - 05 Sep 2008 : 03:41:25
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With regulatory reform again creeping back onto the new Government's agenda, the AEOA would like to see the policy deliberations underpinning reform to be driven by far-sighted strategic concerns with regard to what broad-based employee share ownership could achieve for employees, society and the economy. It is time to ask the following:
Developing an ESOPs policy – the major questions
To develop a strategic approach to employee share ownership, the Government must consider the following issues:
1. Whether all employees – rather than the small minority who work for listed companies – should be entitled to share in the ownership of the enterprise in which they work.
2. Whether diverse forms of equity participation are required to enable all employees to secure a stake in their employer’s enterprise.
3. Whether all employees, and particularly those who work in small companies, should be able to use ESOPs to buy-out their employer, or otherwise to participate in a buy-out (or buy-in).
4. Whether the employees of foreign companies should have the opportunity to share in, and increase, Australian ownership of these firms by means of appropriately designed employee equity plans.
5. Whether employee-owners should have the same rights as other owners, or whether they should be treated as second class owners by being limited, in effect, to holding their shares for ten years (as they do under the current provisions of Division 13A of the ITAA).
6. Whether ESOPs should be encouraged as a mechanism for funding the formation of new productive capital, particularly in unlisted companies.
7. Whether ESOPs should be seen as a key element in national savings policy, providing a new level of savings in addition to superannuation, and capable of meeting different objectives through being tied to the participation of employees directly in productive investment and wealth creation in their workplaces.
8. Whether, and to what extent, Australia should follow the example set by other leading economies to provide tax and other incentives to promote the spread of ESOPs.
For a complete outline of the AEOA's ESOP policies, see our "AEOA Policy" page at: http://www.aeoa.org.au/0024/default.asp?id=16 . For what needs to be done on ESOP tax and corporate law reform, see our "Future Directions" page at: http://www.aeoa.org.au/0024/default.asp?id=14
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admin
632 Posts |
Posted - 13 Sep 2008 : 04:02:38
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What is needed to Reinvigorate ESO in Australia?
Since the heady days of 1995 when all sides of politics supported legislative change - culminating in the introduction of Division 13A (ITAA) to encourage Employee Share Ownership (ESO) - "the shine has gone off the ball".
Encouraging ESO in Australian enterprises was seen in 1995 as important bipartisan national policy, because firstly, overseas studies provided unambiguous emperical evidence that employee equity participation either directly achieved or complemented improved organisational productivity and performance and secondly, competing industrialised countries all had or were introducing tax concessions to encourage ESO.
Is it different in 2008? No, in fact emperical evidence is now even more conclusive as to the link between employee equity participation and organisational performance. However, in Australia over the last twelve years the concessions have been eroded and the road to effective ESO implementation has become more complex and costly.
The following initiatives are broad policy issues that the ALP Government should be looking at to help Australia achieve world best practice in this increasingly important area of productivity enhancement, savings, human capital development and workplace relations.
1. Simplification.
The easier an ESO scheme is to design, document, implement and manage, the more companies will embrace the concept, with greater numbers of employees participating in employee share ownership than currently.
2. Standardisation and Flexibility.
Standardisation and flexibility may seem incompatible. Standardisation is important to achieve 1. above. Flexibility is desirable to ensure the special circumstances of each case and/or company can be accommodated. Generic ESO plans could be made available, with offer statements setting out the variable terms.
3. Reinstatement of taxation concession to 1995 levels at least.
Like bracket creep, ESO taxation concessions need to be constantly reviewed to account for changes in value over time. Otherwise the benefit is quickly eroded. All major OECD countries have generous concessional taxation initiatives which encourage ESO. The UK, and the US in particular provide a significantly higher $ value concession per employee in both real and relative terms, when compared to Australia.
4. Quality research and registration of ESO’s
Without quality research Australia is dependent on overseas studies to support ESO development. The Government needs the research to be Australian based because the taxation concessions granted represent a budgetary cost, at least initially, which must be offset by revenue or productivity gains to justify the cost. Without the research we are simply flying blind. Registration of employee share schemes will significantly improve research data.
5. Emphasis on General Employee ESO concessions.
Too much emphasis has been placed on ESO as an executive reward, particularly by the ALP. While executive rewards and incentives are a critical aspect of organisational performance and corporate governance, the benefits of general employee equity participation have been too often overlooked.
For more information on what the AEOA is advocating, see our "AEOA Policy" and "Future Directions" web-pages at the links in the post above.
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admin
632 Posts |
Posted - 10 Nov 2008 : 07:01:45
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Making ESOPS Hard
From: http://www.employeeownershipgroup.com.au/default.asp?id=18
The key problems posed for the design and implementation of employee share plans by the Tax and Corporations law in Australia are as follows.
A biased, unjust and heavy-handed way of taxing share plans.
ESOP taxation provisions favour the Exempt Plan (which can access CGT) over the Deferred Plan (which cannot). This reinforces the tendency of the share plan regime to pen employees into the Exempt Plan and ensures that employee ownership in Australia will never mature.
Employees restricted to choosing either an Exempt or a Deferred Plan in any tax year.
This has the effect of locking rank-and-file employees into the Exempt plan and of thereby limiting employee ownership to minimal levels, particularly where shares are issued free. This way of confining ordinary employees to the Exempt Plan tends to defeat the key objective of employee ownership: to promote deep levels ownership in the employer's company.
Onerous and costly prospectus requirements.
These are burdensome for unlisted companies and for small companies that wish to offer shares widely. These requirements represent the major obstacle to the spread of ESOPs.
Weak tax integrity.
The Australian Tax Office at present has no administratively effective way of checking the tax obligations of employees occasioned by their participation in share plans.
Restricting ESOPs to ordinary shares in the employer's company.
This means that companies that cannot issue an ordinary share - for example, a wholly owned domestic subsidiary of a foreign company, or a small company in which control is vital to the owners - can do nothing to help their employees become part-owners of the business.
A limit on employees acquiring, though an ESOP, more than 5 per cent of the voting shares in their employer's company.
This limit does not match what is required, especially by small entrepreneurial businesses, in order to attract and to hold key employees. The limit also means that small companies often would be unable to implement "succession planning" arrangements where the retiring employer uses an ESOP to sell the company to his employees.
To see the full EOG Policy paper on Share Plan Reform, go to: www.employeeownershipgroup.com.au
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admin
632 Posts |
Posted - 21 Nov 2008 : 04:47:59
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Agenda for share plan reform
The Employee Ownership Group (EOG) has called on the Federal Government to implement the following tax and corporate law reform measures to improve the quality of employee share plans in Australia and increase the numbers of people participating in them.
• A single share plan with tax-exempt and tax-deferred elements;
• Tax to be applied only when the value of shares is realised;
• Growth in share value to be taxed as capital rather than as income;
• The flexibility to offer a wider range of equities than simply ordinary shares;
• More advanced share plan integrity measures; and
• Streamlined disclosure requirements
From: http://www.employeeownershipgroup.com.au/default.asp?id=13
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admin
632 Posts |
Posted - 31 Jan 2009 : 05:10:32
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Regulatory reform and employee share ownership in unlisted entities: New research report released.
The report 'Employee Share Ownership in Unlisted Entities: Objectives, Current Practices and Regulatory Reform' by Ann O'Connell from the Employee Share Ownership Research Project at the Melbourne Law School, University of Melbourne, was published in December, 2008.
This research report provides a further valuable contribution to the development of employee share ownership in Australia. The report’s conclusions provide important guidance to the Federal Government in its forthcoming deliberations on the legal and regulatory impediments to the growth of employee ownership in Australia.
The report agrees with the AEOA view that the corporate perspective on ESOPs is that they are about investment while the tax perspective is that ESOPs are only about employment and remuneration. The report concludes that “this policy divergence may be part of the reason why it is difficult to achieve significant reform in relation to employee share ownership” (see page 33). Perhaps as a result, the report also states that “it is a well recognised fact that the take-up rate of employee share ownership since its introduction in Australia in the 1970s in the unlisted sector is significantly lower than in the listed sector” (page 9).
The report concludes with the clearest statement possible about the need for ESOP tax and corporate law reform – and very much in line with what the AEOA has been stating for a decade:
“The conclusion that can be drawn about the current regulation of ESOPs is that it fails to meet the requirements of equity, efficiency and simplicity. First, the regulation fails to achieve equity because it treats unlisted entities and their employees differently from their listed counterparts. This arises in corporate law because the relief from disclosure is only available where the entity is listed and in tax law because the rules favour listed entities. Secondly, it fails to achieve efficiency because it does not encourage the use of ESOPs in accordance with government policy to do so. In fact it would appear that many entities structure
arrangements with employees to avoid the operation of the regulation or alternatively decide not to take advantage of the concessions because of the onerous legislative requirements. Finally, the regulation is highly complex, especially the tax legislation so that entities require professional advice to set up the ESOP and ongoing advice to ensure that the arrangements comply with the legislative requirements.
In order to achieve equity, efficiency and simplicity it is necessary to make significant changes to the regulation of ESOPs. It is important to recognise that the legislation has become so complex and difficult that nothing less than a complete rewrite will suffice" (pages 39 and 40).
This important report may be accessed at:
http://cclsr.law.unimelb.edu.au/index.cfm?objectid=A9840D89-1422-207C-BA2319347B2EE439
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admin
632 Posts |
Posted - 31 May 2009 : 11:21:50
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Corporate Australia Supports the Need for ESOP Regulatory Reform
The latest report from the ESOP Research Project at the University of Melbourne's Law School - “Broad-based Employee Share Ownership in Australian Listed Companies: Survey Report”, April, 2009, provides interesting data on what Corporate Australia sees as being needed in the area of regulatory reform.
The research report is based on a survey sent to 1711 ASX listed companies. 419 companies completed ‘Part A’ of the report, a response rate of 24%. Of these, 238 companies were eligible to complete ‘Part B’ of the report (on broad-based plan practices), but only 139 did so. The results detailed in the report are based on the data supplied by these 139 companies (a fairly large sample).
Of the companies responding, one third (34.5%) were in the mining industry (reflecting almost exactly the make-up of the ASX), 12.5% were in finance and insurance and 8.9% in manufacturing. 56.5% of the companies had turnovers of less than $20 million (and employed fewer than 50 employees) while 23.2% had turnovers of $100 million or more (and employed 1000 employees or more). 60% of the companies employed more than 90% of their staff on a full-time basis. Nearly all plans were open to all full-time staff, with 62% also being open to permanent part-time staff, 13% to independent contractors and 10% to casual staff. 57% of the respondents had a broad-based plan (or plans), 33.2% had none and 10% had one previously. Significantly more companies reported having a broad-based plan than a narrow-based plan (ie: a plan open only to executives). The adoption of broad-based plans is also relatively new, with over three quarters having introduced the plan since 2000 – 77.1% since 2000, 21.4% in the 90s and only 1.2% between 1982 and 1989.
The study found much support for an ESOP reform agenda very similar to that being advocated for by AEOA.
The study found that many listed companies view the existing regulation of ESOPs in taxation law as constraining. Over three quarters of companies surveyed agreed that the $1000 tax concession currently available should be increased. There was also strong support for the proposition that tax deferral plans should, like exempt plans, be eligible for capital gains tax (CGT) treatment. There was also strong support for the proposition that all regulation of ESOPs should be brought together under a single piece of legislation. There was considerable support for unifying and simplifying existing rules.
The results were as follows (with companies being able to select more than one):
- The $1000 concession under Division 13A should be increased – 77%
- Tax deferral plans should be able to use the capital gains tax provisions – 72.8%
- Single piece of legislation under one Act – 64%
- Parliament should specify minimum information - 54.8%
- The 5% limit on number of qualifying shares should be raised – 52%
- ESP should be exempted from disclosure filing requirements – 40.5%
- Should be an Employee Share Plan Development Promotional Unit – 38.1%
- All ESP should be registered with a regulatory agency – 24.8%
- Should establish Employee Share Plan Regulatory Agency – 17.7%
The full report can be seen at: http://cclsr.law.unimelb.edu.au/index.cfm?objectid=A9840D89-1422-207C-BA2319347B2EE439 .
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admin
632 Posts |
Posted - 04 Jul 2009 : 03:35:36
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REFORM OF TAXATION OF EMPLOYEE SHARE SCHEMES
Press release: Senator Nick Sherry, Assistant Treasurer, 1 July, 2009
The Assistant Treasurer, Senator Nick Sherry, today released a Policy Statement setting out the final taxation treatment of shares and rights acquired under employee share schemes, effective from today. The final policy provides further certainty to allow companies to continue to provide share schemes into the future.
“The Government strongly supports employee share schemes. We also support the role of the tax system in encouraging employees to be involved in share schemes – we made that clear in the Budget and we’ve been consistent in that support.”
“As with all tax policies, however, the overall integrity of the tax system is a critical concern. The Government must balance its obligations to ensure ongoing system integrity and the need to be sure that our tax system applies fairly and equitably to all Australians.”
“These are the motivations for the Government’s reforms to the taxation of employee share schemes,” said the Assistant Treasurer.
Under the arrangements outlined on Budget night, all discounts on shares and rights provided under an employee share scheme would be assessed in the income year in which the shares and rights are acquired.
The Government issued a public consultation paper on a new regime, which sought to balance industry concerns with the need to address the acknowledged problems of tax evasion and tax avoidance.
“As part of that consultation process, the Government has taken on board the concerns raised and examined the most efficient way of protecting the tax base and cutting down on potential avoidance and confusion at the higher end while maintaining the current support for employee share ownership schemes, particularly for low and middle income workers.”
“The Government is announcing today that it has adopted the changes that were proposed in the consultation paper with several final modifications to address some of the concerns raised during the consultation,” said the Assistant Treasurer.
Modifications from the position announced in the consultation paper are:
• increasing the income tax threshold for eligibility for the upfront tax concessions from $150,000 to $180,000, to align it with the top marginal tax rate threshold;
• providing further clarity on the meaning of “real risk of forfeiture” via the use of explanatory materials and Tax Office materials, including through the use of a range of example cameos to assist industry;
– Employees receiving benefits under these schemes will not be able to pay tax upfront and the scheme’s governing rules must clearly distinguish these schemes from those eligible for the upfront tax exemption.
• moving the deferred taxing point from a point at which the taxpayer will no longer have a real risk of losing the share or right to a point at which:
– in the case of shares, there is both no longer a real risk of the taxpayer losing the share and no restriction (present at acquisition) preventing the taxpayer from disposing of the share; and
– in the case of rights to shares (options), there is both no longer a real risk of the taxpayer losing the right and no restriction (present at acquisition) preventing the taxpayer from either disposing or exercising of the right, however, if after exercising the right, the underlying share is subject to forfeiture and restrictions preventing the taxpayer from disposing of the underlying share, it is the point at which there is both no longer a real risk of the taxpayer losing the share and no restriction (present at acquisition) preventing the taxpayer from disposing of the share.
• allowing the deferral of tax in relation to up to $5,000 worth of shares under particular salary sacrifice based employee share schemes, where there is no real risk of forfeiture.
• removing the reporting requirement for employers to report the market value of employee share scheme benefits in the year of grant, if this is not the year in which the employee is taxed; and
• establishing a three part forward plan of consultation with industry by:
– asking the Board of Taxation to examine two remaining issues (a) how best to determine the market value of employee share scheme benefits; and, (b) whether shares and rights under an employee share scheme that are provided by start-up, research and development and speculative-type companies should be subject to a tax deferral arrangement, despite not being subject to a real risk of forfeiture;
– commit to an Exposure Draft process of the Bill to ensure the policy is accurately reflected in the application of the law, including consultation on a range of technical issues raised in submissions that will be contained in the Exposure Draft Bill; and
– supplementing this process by asking the Board of Taxation to consult with stakeholders ,in particular interested members of the previous Consultative Group, to examine technical matters associated with the implementation of these reforms, and to report to Government in time to allow the Board’s views to be taken into account in the draft legislation.
“This final framework will boost integrity through reporting, better target support through the income threshold applying to the upfront concession and greatly improve corporate governance outcomes by requiring most schemes to feature a real risk of forfeiture to gain access to the deferral tax concession.”
“Salary sacrifice based schemes will also benefit through a targeted cap that will facilitate limited deferral for most members.”
“I would like to thank industry and the various stakeholders for working with the Government during the last few weeks,” said the Assistant Treasurer.
Under the final framework for employee share schemes, the taxation of discounts on shares and rights acquired under an employee share scheme will remain the starting principle of the regime, with concessional treatment available for particular schemes.
The upfront tax exemption will be means tested and tax deferral will only be accessible where there is a real risk that the shares or rights may be forfeited, such as due to performance hurdles or employment conditions. The pre-Budget use of cessation of employment as a taxing point will be retained and the maximum 10 year deferral period will be reduced to seven years.
A full reporting regime will also be introduced to significantly boost the integrity of the taxation of share schemes.
The combination of these final reforms and the measures in the 5 June, 2009 consultation paper are set out in the attached Policy Statement.
As previously announced, the existing law will apply to all shares and rights acquired before 1 July 2009. The Government will introduce the legislation during the Spring Sittings of Parliament.
See the "Policy Statement - Taxation of Employee Share Schemes" for the details on the reforms under "July News", 2009 at: http://www.aeoa.org.au/0024/default.asp?id=65 .
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admin
632 Posts |
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admin
632 Posts |
Posted - 17 Nov 2009 : 05:25:35
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Troubled Times Might Dash Hopes of Real Reform
During the past decade, the AEOA has given a great deal of attention to policy development and has shaped its policy to focus reform upon the 'shop floor', upon unlisted companies and small business, and upon share plan integrity. (See “Our Policy”). Above all, the AEOA policy is about ordinary men and women owning ordinary equity in the companies where they work.
Over the last decade also there has been an explosion in employee share options plans. There are some questions about the merits of options. While the jury is still out on the issue, there is reason to doubt whether options can ever provide anything more than icing on the employee ownership cake. The fundamental problem with options is that, while they promise to deliver large, short-term rewards, by their nature they do not deliver long-term, substantial, ownership of real equity in a business. It is the latter, and not the former, which is the key objective of employee ownership.
The really big issue for employee ownership is the amount of real equity employees can acquire.
One of the common findings of international research is that the productivity and efficiency effects of employee ownership do not 'kick in' until employees acquire a substantial number of shares in the companies that employ them. Productivity effects aside, employee ownership's principal aim is to enable ordinary workers to become fully-fledged and active co-owners of the capital resources deployed by a free enterprise' society. In this project, tokenism is the enemy. So it is vital to the success of employee ownership policies that employees can acquire big licks of equity.
Yet, against this, is the fact that there are three major features of the ESOP system in Australia that inhibit the acquisition of major equity in firms by employees.
- The first is the $1,000-limit on the number of shares acquired annually under the “Exempt share plan”.
- The second is the fact that the potentially powerful “Deferred share plans” taxes capital gains at the income tax rate.
- And the third is that share plans leveraged along American lines so far have found little place in the Australian employee ownership kit bag.
Behind these three obstacles to deeper worker ownership lies the notion that share plans are just another way of remunerating and rewarding employees.
This idea is deeply ingrained, as much among some practitioners of employee ownership as among the Treasury officials and Governments who frame our ESOP laws. It is being further reinforced by the proposed Budget changes. And it is precisely this idea (spiced by the dream of getting rich quick) that has stimulated an exaggerated interest, both here and abroad, in option plans. It is important for advocates of employee share plan reform to jettison this kind of intellectual baggage.
With the Government examining new policy proposals for employee share ownership, The AEOA will want to be convinced that anything new that is being proposed will bring substantial, concrete, and long-term benefits to ordinary working people. This means, from a Government perspective, an ESOP policy that delivers the largest number of shares to rank-and file workers, that boosts their savings, and that does so without blowing a hole in the budget.
It is a major challenge – but one which the AEOA is prepared to meet.
(This is an edited version of an article first published in the AEOA “Equity Report” magazine, Vol. 11 no. 2, November, 2001).
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admin
632 Posts |
Posted - 22 Dec 2009 : 04:43:41
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Reforming the taxation of employee share schemes
For a complete overview of the legislation enacted in December, 2009 (Division 83A) - and all the supporting material on the tax changes - see the Australian Tax Office's new web-page "Reforming the taxation of employee share schemes" at: http://www.ato.gov.au/taxprofessionals/content.asp?doc=/content/00193904.htm. |
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admin
632 Posts |
Posted - 22 Dec 2009 : 04:46:59
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Tax reform to employee share schemes to encourage good corporate governance - Nick Sherry.
From: Ethical Investor Newsletter no.338, Wednesday, 16 December 2009. Written by Oliver Wagg. (www.ethicalinvestor.com.au).
Federal government reform of employee share scheme tax fits into a broader agenda to encourage good corporate governance, increase Australian productivity and return the budget to surplus, said Assistant Treasurer Nick Sherry.
Speaking to the Australian Employee Ownership Association (AEOA) in Sydney on 10 December,Sherry said employee ownership boosts workplace productivity through greater employee involvement and engagement, and increases job satisfaction.
“Employee ownership can contribute to innovation in the workplace, lower staff turnover and engender a culture of corporate social responsibility,” he said. “Most importantly, it means employees share in the wealth and successes created through their hard work.”
The changes to the taxation of employee share schemes were part of a package of reforms announced in the May federal budget. Soon after, it became clear the government needed to change its approach and it decided to consult with industry stakeholders, such as the AEOA.
The government softened previously planned reforms with several concessions, including raising the income threshold below which workers are eligible to certain exemptions on upfront tax to $180,000 – in line with the top income tax bracket – up from the $60,000 in the original budget announcement.
Sherry admitted development of the reforms in past six months “has not always been smooth.”
“In those six months we've managed to come together and settle most points of difference.”
The final legislation includes a number of measures, such as the introduction of reporting requirements: employers that provide employee share scheme benefits now have to provide information to the Tax Office.
Sherry has asked the Board of Taxation to consider two further issues raised in consultation: how to best determine the market value of employee share scheme benefits; and whether employee share schemes for start-up, research and development or speculative-focused companies should have separate tax deferral arrangements.
The board will report its findings in relation to these issues to Sherry by February
For the full text of Senator Sherry's speech, see http://ministers.treasury.gov.au/DisplayDocs.aspx?doc=speeches/2009/021.htm&pageID=005&min=njsa&Year=&DocType=
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admin
632 Posts |
Posted - 02 Apr 2010 : 04:10:04
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Making ESOPS Hard - Update for the New Division 83A of the ITAA
In certain respects the new Division 83A represents an advance on the now superseded Division 13A as a means of spreading employee share ownership more widely among rank-and-file employees. But in other ways, Division 83A preserves - and even extends - the old obstacle course in the way of broader employee share ownership.
The more things change …
Two great weaknesses of the old regime were:
Problem 1: Employees restricted to choosing either an Exempt or a Deferred plan in the same tax year.
This had the effect of locking ordinary employees into the Exempt plan and of thereby limiting employee ownership to minimal levels, particularly where shares were issued free. This way of confining ordinary employees to the Exempt plan tended to defeat the key objective of employee ownership: to promote deep levels ownership in the employer’s company.
Problem 2: Weak tax integrity.
The ATO had no administratively effective way of checking tax obligations of employees occasioned by their participation in share plans.
Both problems were addressed and resolved by the new Division 83A.
Reform 1: Abolition of up-front election.
First, the new legislation abolished a perplexing requirement (under the old s 139E) to make a decision about whether or not to pay tax upfront – a decision that determined whether a rank-and-file employee could benefit from the tax-exempt concession. If, thanks to this mechanism, an employee chose to participate in a tax-exempt plan, he was closed out of participating in a tax-deferred plan. Now, under Division 83A, an employee benefits from the available tax concessions simply by participating in a share plan. Hence an employee can participate in the same tax year in:
- a tax-exempt plan;
- a tax-deferred share plan; and
- an option plan.
This is a major reform long advocated by the Employee Ownership Group
Reform 2: Introduction of TFN-based reporting system
Secondly, the new legislation introduced a TFN-based reporting system to ensure that all tax obligations arising from participation in any employee share plan are fully reported. This measure is also one that the EOG has promoted for many years. Unfortunately, the Government spoiled the simplicity and efficiency of the measure by linking it to an over-the-top reporting system – one that is onerous on business and does not provide the ATO with better or more timely intelligence about the tax obligations of employees.
… the more they remain the same
Notwithstanding these valuable reforms, several deficiencies of the previous system endure in the current one and new problems have been created.
An illogical, unjust and heavy-handed way of taxing share plans.
Division 83A provisions continue the old Division 13A tax treatment of Exempt and Deferred plans. When shares acquired under an Exempt plan are sold, any increase in value is taxed at the CGT rate. However, when shares acquired under a Deferred Plan are sold, they are subject to income tax applied to the full value of the shares on the date of sale. This is illogical and oppressive. There is no ground for treating Exempt shares in the normal manner and Deferred shares in an abnormal - and unfavourable - manner except, perhaps, to penalise the wider spread of employee share ownership.
Onerous and costly prospectus requirements.
These are burdensome for unlisted companies and for small companies that wish to offer shares widely. These requirements represent the major obstacle to the spread of ESOPs.
Restricting ESOPs to ordinary shares in the employer’s company.
This means that companies that cannot issue an ordinary share - for example, a wholly owned domestic subsidiary of a foreign company, or a small company in which control is vital to the owners - can do nothing to help their employees become part-owners of the business.
A limit on employees acquiring, though an ESOP, more than 5 per cent of the voting shares in their employer’s company (the 5 per cent Rule).
This limit does not match what is required, especially by small, entrepreneurial businesses, in order to attract and to hold key employees. The limit also means that small companies often would be unable to implement “succession planning” arrangements where the retiring employer uses an ESOP to sell the company to his employees.
New obstacles
Options can be taxed before employees can realise any value from them
A basic condition that share or option plans must meet in order to secure tax-deferred is that the shares or options must be subject to a “real risk of forfeiture”. When this “real risk of forfeiture” is lifted, then the shares or options are subject to tax. For options, this presents a serious problem. The normal international practice is to tax them upon disposal. Taxing options upon the lifting of any forfeiture conditions means that an employee can be taxed on “income” attributed to him that he might never receive. This is contrary to basic principles of tax logic and equity.
The maximum tax-deferral period has been scaled back from 10 to 7 years.
To limit tax-deferral to a set number of years is contrary to the notion of spreading employee share ownership. Limiting deferral to an arbitrarily chosen point in time will have the effect of obliging employees to sell shares when that period of time has expired. The aim of employee ownership is to promote the ownership of shares among employees that are held for the long term. The term of the holding is important. The longer shares are held, the greater the alignment between the interests of employees and the interests of the company in which they work. This alignment should not be arbitrarily terminated by Government fiat.
From: The Employee Ownership Group Policy Paper - see www.employeeownershipgroup.com.au
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admin
632 Posts |
Posted - 02 Apr 2010 : 04:16:00
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ESOP legislative reform measures
To reform ESOPs requires a single, integrated package of reforms implemented, perhaps step-by-step, with the aim of constructing a fully articulated legislative and regulatory environment in which to cultivate a widespread and deeply-rooted employee ownership culture.
a. Replace the separate Exempt and Deferred plans with a single structure taxed on the basis of consistently applied principles.
To break down the tax bias in favour the Exempt Plan, to encourage employees to take up greater amounts of equity than an Exempt plan can deliver, and to introduce fairness and consistency into the taxation of the Deferred Plan, amend Division 83A to provide for a share plan in which:
(i) the first $1,000 (or some higher amount) is tax exempt (with CGT on any growth); and
(ii) any amount above $1,000 (or some higher amount) to be tax deferred until shares are sold or options exercised (i.e. no 7 year rule) at which time the discount given at grant be taxed at marginal Income Tax rates and the growth to be taxed as a capital gain with the benefit of the CGT discount.
b. Exempt ESOPs from existing prospectus requirements.
ESOPs should be exempted by legislation from the prospectus provisions of Corporations Law. The necessary investor protection can be achieved by a minimum prescribed disclosure regime for ESOPs (see Appendix B).
This new prescribed regime could be achieved either by ASIC exercising its existing powers of exemption and modification, or by Government direction to the ASIC in relation to the exercise of these powers, or by legislative reform.
c. Widen the definition of equity given in Division 83A.
Division 83A should enable an listed-company employer to offer an employee any instrument, or form of equity, or right thereto, in the employer’s company, that entitles the employee to:
1. Voting rights,
2. Dividends, and
3. An entitlement to capital.
An unlisted company employer should be able to offer an employee any instrument, or form of employer company equity, or right thereto, that offered the employee at least 2 and 3 (above).
e. Increase the 5 per cent Rule to 10 per cent
The proposed new limit would go some of the way to matching international practice and would pave the way for owners to use ESOPs to sell down businesses to their employees as part of “succession planning” strategy.
From: THe Employee Ownership Group - www.employeeownershipgroup.com.au
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admin
632 Posts |
Posted - 11 May 2010 : 06:01:49
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The ALP's ESOP World: An ESOP Policy has yet to be prepared ....
Now that the Government has overcome - through the passing of very different legislation - the debacle of it’s attempt to tax employee share ownership into oblivion through its 2009 May Budget amendments, it can settle down to the longer term work of framing policy that really can make a difference to who owns Australia. This will mean addressing the real problems still embedded in the ESOP legislation. It also means laying a foundation for the development of a strategically conceived policy to promote employee ownership as a central plank in the economic, social and industrial reforms required for this country.
While the Government undoubtedly has a ‘gut instinct' that employee ownership is a good thing, it currently lacks a clearly articulated rationale for it. It has yet to explain how employee ownership fits it’s vision for Australia.
Perhaps it is unrealistic to expect Ministers and MPs to be philosophers and visionaries as well as practitioners. We can, however, expect them to have an eye to the main chance and to know where their interests lie. How, then, would sound policies on employee ownership serve the long-term political interests of the ALP? And what kind of policies are needed?
The Politics
The future of the Federal Government depends very much on how successfully it cultivates the so-called ‘aspirationals’ - the battling ‘mortgage belt’. One way for the Government to cultivate this vote is to ensure that ordinary Australians become direct stakeholders in the country’s wealth-creating activities through employee ownership.
Since the end of World War Two, the preoccupying goal of most Australians has been home ownership. However, a new ownership frontier is opening up and the fortunes of future governments will depend in good measure upon their success in freeing people to become active participants on it. Australians are now moving forward from owning their own homes to owning the companies which employ them. From now on one of the major responsibilities of political parties will be to provide the means whereby Australians can achieve this new and exciting objective.
The question is whether the means are available to enable Australians to turn themselves into employee-owners.
Current Legislation
There are major defects in the ESOP legislative provisions. We’ve pointed these out many times before. But they’re well worth stating again:
1. A two-tiered system of share ownership; one for traditional shareholders who can hold their equity in perpetuity; and one for employee-owners who cannot hold their shares for more than 7 years.
2. A limit on employees holding, via an Employee Share Ownership Plan (ESOP), more than 5 per cent of the voting shares in their employer’s company - which means that most small companies cannot implement succession planning arrangements where the retiring employer uses an ESOP to sell the company to his employees.
3. Restricting ESOPs to ordinary shares in the employer’s company: which means that those companies which cannot issue an ordinary share - for example, a wholly-owned foreign subsidiary or a small firm whose owners do not wish to relinquish control before retirement - can do nothing to help their employees become part-owners of the business.
No promises have been made to address - let alone solve - any one of these three major problems, nor their corollary - a systematic discrimination against the small business sector and those employed in it towards accessing ESOPs.
The Bottom Line
In order to correct the anti-small business bias of the ESOP legislation, the AEOA has taken the view that the Government should amend existing ESOP law to enable SME’s to more easily implement employee share ownership arrangements. To achieve this, the minimum reforms required are:
· To raise, at least in the case of small companies, the limit on employees holding more than 5% of voting shares.
· To lift the prohibition against ESOP using equities other than ordinary shares and to allow for the use of other equity types useful to small business.
· To tax upfront gains as income and capital growth as CGT (upon the realisation of the shares in both cases).
The Broader Vision
Now that the ALP is looking towards governing for the long term, it needs to do more than make minimalist amendments to the legislation it inherited. Instead, it has the opportunity to set the agenda by developing an integrated strategic policy on employee ownership. To achieve this requires a grasp of where employee share ownership fits into a spectrum of policies covering taxation, industrial relations, savings, company financing and expanding Australian equity in foreign-owned companies.
For a summary of the key policies required, see "Developing an ESOP Policy: The Major Questions" in the post for 8th September, 2008 above.
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Regulatory Reform
