Employee Ownership Sector Calls for Sweeping Reform

by Employee Share Ownership on March 11, 2014

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Canberra, 3 March, 2013; Employee Ownership Australia and New Zealand Association (EOA) called on the Federal Government Treasury Committee to introduce widespread reform in the taxation and regulation of changes in employee ownership in Australia.

The EOA is calling on the Government to support the following initiatives for much needed reform of employee share schemes including:

  • Return to the Principles in the pre-2009 Legislation and Correct the Current Issues
  • Create an effective and simple Employee Plan for Start-Up companies
  • Create a Plan that can be used by Companies at a Business Succession Planning stage
  • Review the Employee Share Scheme Regulatory Regime in General
  • Create a Taskforce to Review and Implement these Changes

EOA will make its case for an easing of the regulatory burden on employee share plans based on a wealth of international research showing that employee ownership improves productivity, growth, job creation and job stability, and employee engagement.

Australia lags behind the rest of the developed world in the area of employee share ownership. While broad-based employee share ownership is relatively widespread in the listed company sector in Australia, it is estimated that only 3% of private and unlisted companies have ‘all-employee’ share ownership schemes, compared to 23% in the US.

Research by the former Department of Employment and Workplace Relations (2004) found the major reason that employee share ownership has not grown in SMEs in the Australian economy is because of complexity and compliance issues, particularly surrounding the costs of implementing employee share ownership.

“We are delighted to have this great and timely opportunity to speak to this committee about employee ownership and we are recommending a series of changes which will allow employee share plans to operate more efficiently.  We believe this will create greater employee ownership levels” said Angela Perry, chair of the EOA and Global Head of EPS BD at Link Market Services Limited. “Broad based employee share ownership has been unequivocally shown to promote employee engagement and productivity, and ultimately lead to the enhancement of national savings,”

Karen Quinsey, Director at PwC:  “This is a fantastic opportunity for much needed dialogue in these areas concerning employee ownership.  We are optimistic that we are on the track to correct fundamental flaws in the current tax rules and build new rules to encourage and achieve broad based employee share ownership going forward, and this will benefit the Australia economy.”

This reform is widely backed by the market as well.

“The Governance Institute has and continues to recommend a review of ESSs for all company types and sizes, regardless of whether they are start-ups or well-established companies” said Tim Sheehy Chief Executive for the Governance Institute.  “We also strongly support the recommendation made by the Productivity Commission and the recent presentation to Government to remove cessation of employment as a taxation point for these plans”.

AusBiotech, industry association for Australia’s rapidly-evolving biotech sector, says the burden placed on companies in 2009, with the changes to ESS, had wrongly captured small, innovative companies that often do not have the ability to reward employees with cash and so use shares and options as incentives and future rewards.

AusBiotech CEO, Dr Anna Lavelle said: “AusBiotech supports a more effective treatment of start-up companies, to support the growth of the innovative sector in Australia, and is advocating for a restoration of the ESS to its pre-2009 form. Australia needs an effective and rational tax system, which enables success sharing at the time it occurs (i.e. when shares are realised), not when they are issued.”

“The review of the employee share scheme rules for start-up companies provides a great opportunity to accelerate employee ownership in start-ups, says Andrew Clements, Partner, King & Wood Mallesons. The key to effective reform is a coordinated simplification of the tax and corporate rules applying to start ups. A review of the tax rules alone is unlikely to be effective. Effective tax reform requires an alignment of the taxing point for participants indicating when they can access the benefit from their participation.  The current tax rules do not provide this alignment”.

“Share and option plans are the one area where people are taxed in Australia before they get the money they’re taxed on – even though they may never get it. This needs to be fixed! It’s most acute for start-up companies which don’t have the cash necessary for competitive salaries and so rely on employer equity. If we are to compete globally for talent we need to meet the market – we can’t keep taxing people before they’d be taxed overseas,” argues Adrian O’Shannessy, Director, Greenwoods & Freehills, Australia’s largest specialist tax advisory firm

END

More information
Angela Perry
Chair of EOA and Global Head of EPS, Link Group
P: 61 3 9615 9685 M: 61 424 557297

Fast Facts


UK – FTSE companies whose employees owned 3% or more of the stock substantially outperformed the market in 2013. According to the FTSE calculated UK Employee Share Ownership Index, the total return of shareholders in ESOP companies rose by 53 percent last year, compared with 21 percent for FTSE All-Share. At the end of the year the new ESOP Index stood at 714.9 (2002=100).

ESOP shares have now risen faster than the FTSE All-Share in eight of the eleven years for which the index has been calculated.

Employee-owned firms have, on average, 4-5% higher productivity than other businesses and the Employee Ownership Index has outperformed the FTSE All Share Index by an average of 10% annually since 1992. The UK Coalition Government is taking action to enable these models to flourish in both the private and public sectors. Employee owned companies make it possible for more people to share the rewards of success.

US – Google topped the annual Fortune list of the 100 Best Companies to Work For. Just behind Google are 40 more companies with employee ownership plans, including Edward Jones (#4), Genentech (#6), Salesforce.com (#7), Intuit (#8), and majority employee-owned Robert W. Baird (#9).

Of the 41 employee ownership companies on the list, six are majority employee-owned, six have ESOPs, nine have broad-based individual equity grant plans (options or restricted stock), 24 have employee stock purchase plans (ESPPs), and two are majority-owned by broadly offered stock purchase plans other than ESPPs. Some companies have multiple plans. To be on the list, created by the Great Place to Work Institute, companies must have 1,000 or more employees.

In the USA there are around 10,900 Employee Share Ownership Plans (ESOPs) employing more than 13 million US employees.  In a joint project with the Employee Ownership Foundation, the NCEO found that employee ownership averts a substantial amount of unemployment and saved the US Federal Government over $23 billion in 2010. Data from the General Social Survey shows that in 2010, for instance, 12.1% of all working adults in the private sector reported having been laid off during the prior 12 months, compared to just 2.6% of those respondents who own stock in their company through a company-sponsored employee ownership plan. This dramatic difference remains even after adjusting for different conditions faced by employee-owners and non-employee-owners.

Start-ups are essential to our economy and the structure of employee ownership needs to be addressed immediately.

  • Starts ups are likely to contribute $109 billion and 540,000 jobs to the Australian economy by 2033.
  • There are 1,500 start-ups in Australia with the key hubs in Sydney and Melbourne.
  • The growth of the Australian technology sector is essential to the future success of the economy. It enhances productivity, creates global reach and improves customer experience.

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