- A new regime needs to be created for start-ups which aims to tax employees of those companies when the shares are realised and the employees gets the value, i.e. at sale or disposal. The definition of start-ups should not be defined so narrowly that it has no valuable purpose;
Amendments to the Existing Rules
- Options should be taxed at the time of exercise. This puts Australia on par with the rest of the world;
- Remove the termination of employment as a taxation point. Currently Australia is the only country where this is a taxation point for employees and it runs counter to Corporations Law termination legislation, ASA guidelines, institutional shareholders and proxy advisors desires for employees to continue to hold shares after they leave a company;
- Remove the $5,000 salary sacrifice limit. The $5,000 salary sacrifice limit has inhibited the ability of employees to make meaningful savings through employee salary sacrifice employee share plans. The average salary sacrifice amounts before 1 July 2009 were significantly above $5,000 per participating employee.
- $1,000 tax reduction limit needs to be increased. The $1,000 tax free amount for plans (formerly known as “exemption”) plans has not been increased or indexed since its inception in 1997. In real terms the value of $1,000 has significantly decreased. For this to remain meaningful to Australian employees it needs to be increased.
- New rules are needed to assist companies plan succession. 60% of businesses do not intend to hand over the business to their family, which will leave a large number of companies faced with potential shut down unless they can find an alternative model. This is an area where the UK CGT concession should be considered to encourage employee ownership as a succession planning mechanism that will ultimately help companies survive.
- The discussions about employee share plans should not be restricted to start-up companies or isolated reform. There should be a broad based review of taxation legislation, valuation methodology and corporate law to make the administration of employee share plans simpler and easier to use.
“Employee ownership has been proven throughout the world to drive productivity, innovation and increase employee engagement. It is critical that any reform encourages companies to implement plans, and simplifies the process”, says Angela Perry, Head of Global EPS Business Development at Link and Chair of Employee Ownership Australia and New Zealand.
“Australia’s taxation of share options is out of step with the rest of the world and inhibits the use of share options as an employee equity tool. Survey data shows that the use of share options by Australian listed companies has dropped dramatically since the 2009 tax changes. Urgent action is needed to redress this flaw in the current tax rules” says Paul Ellis, Employment Tax Partner at Ernst & Young.
The UK has had it first employee ownership day this year. The US has an employee ownership month in October and has done so for the last 20 years.
The UK EOI, calculated by index specialist FTSE International, showed shares in companies that have embraced some form of employee ownership have risen three times as fast as their London-listed peers this year.
The European Commission recently published its new Action Plan for employee ownership to:
• identify which initiatives will encourage the development of trans-national employee share ownership schemes in Europe.
• identify and investigate potential obstacles to trans-national employee share ownership schemes.
• take appropriate action to encourage employee share ownership throughout Europe.
The Governance Institute of Australia are also calling for a broad review of employee share plans in Australia.