THE firestorm unleashed by proposed changes to employee share schemes might force the Government to backtrack on some measures, but it has also highlighted the network of mechanisms available to minimise executive tax bills.
As a growing list of companies, unions and lobby groups mark out an assault on the reforms, ministers have stood by the need to shake up a system under which executives can pay just 26c in the dollar on income received as shares. The issues are complex, reflecting the byzantine arrangement of corporate options packages.
Yesterday the Australian Chamber of Commerce and Industry and the Australian Industry Group added their voices to those arguing for adjustments to the budget proposals. But those supporting the Government's intent say there is no need to continue to offer tax concessions to align the interests of employees and their company.
"You can still have the alignment and the presumed social good. However, all that is required is the recipient pay the tax they appear to be avoiding or deferring," a corporate governance expert, Dean Paatsch, said.
Under the changes, participants in employee share schemes would need to pay tax on shares or options in the year they received them. The intent is to crack down on non-compliance and wrong compliance.
For the Australian Tax Office, the most common fault with the schemes is where employees claim capital gains tax reductions on share sales - sometimes many years after they were issued - and fail to disclose them as income. The changes would probably not entirely wipe out the tax advantages of share and options packages.
An example of how tax-effective these packages can be became apparent following the demerger of Toll Holdings into the separate companies Toll and Asciano.
As part of the demerger, Toll made cash payments to executives, such as Paul Little's $8.9 million, to compensate them for share options that were cancelled as a result of the split. But the company also compensated them for having to pay a higher rate of tax on the cash payment than if they received their income as share options.
The cash payment would be taxed at the 46.5 per cent income tax rate. But the share options - all up - would have drawn an effective tax rate of 26 per cent.
There is no suggestion that Toll's arrangements were outside the law. Rather, they would be common and accepted practice, experts said.
Employee share schemes have been lauded for helping to fuse the interests of companies and their staff. But for many, the main benefit is that they enable employees to enjoy a 50 per cent capital gains tax discount on income they otherwise would have to pay full tax for.
A front-page Herald report in 2006 outlined how the system would have worked with Westpac's then chief executive, David Morgan. That year, Dr Morgan received a gain in value of $6.3 million from cashing in options. But Dr Morgan did not necessarily have to pay the top income tax rate of 46.5 per cent on the options, or $2.9 million.
If he had elected to pre-pay tax on the options when they were granted in 2002-03, he would have had to pay an effective tax rate of 13 per cent on the payout.
When the options vested in 2006, he would have had to pay capital gains on the options, but at the reduced rate. In total, his effective tax rate overall would have been under 30 per cent - the same as workers on $25,000.
It is not known if Dr Morgan did pre-pay tax, and his is only a hypothetical example.
