Alan Eggleston (WA, Liberal Party) Share this | Link to this | Hansard source

I present the report of the Economics References Committee on the operation of employee share schemes in Australia, together with the Hansard record of proceedings and documents presented to the committee.

Ordered that the document be printed.

by leave—I move:

That the Senate take note of the report.

Employee share schemes are very widely regarded around the world as being very beneficial to employees in many businesses. There are huge schemes in both the United States and the United Kingdom. They undoubtedly have the benefit of involving employees directly in the success of whatever the enterprise is and they are regarded as improving employee morale and producing better business outcomes. While employee share schemes in Australia are not huge, they are well established. The changes the government made in the May budget were regarded as somewhat controversial. One of the proposals the government made was that employee share schemes should be taxed upfront—that is, on acquisition rather than at some other point such as when the employee left employment or after a period of time such as seven or 10 years. Another serious criticism was that the tax break relating to the first $1000 in value of employee shares was to be changed. This was criticised because the tax break was eliminated for employees earning more than $60,000, which is not regarded as a huge income in this day and age.

There was an outcry across the board at the government’s proposed changes—from unions and employee organisations as well as shareholder groups and employee groups. Employee share schemes were put on hold in many companies around this country because of the outcry which occurred. As a result of that outcry, and in response to opposition led by Tony Smith in particular, to ensure that the changes be made more equitable, the government has now caved in. The threshold for the tax break relating to the first $1,000 of share value being exempt from tax has now been increased to $180,000 per employee. That is a reasonable change, I think most people agree. It is interesting that in many other countries the tax exempt threshold is somewhat higher. In the United Kingdom, for example, it is around £3,000, which is equivalent to $9,000, more or less, in Australian currency. That of course means it becomes quite attractive to employees to get into these schemes and acquire shares in their own organisations.

There was some discussion in the report about where the point of taxation should be: whether it should be at the point of acquisition of the shares—that is, when the individual acquired the shares for the first time—or, for example, when they left their employment with that company. It seems a little unfair to tax people as soon as they get shares, but the government thought that there were good arguments for that. However, in response to submissions and comment made again by Tony Smith, our shadow minister in this area, there has been an agreement that it may be possible to defer tax when there is a real risk of forfeiture of the shares.

Unfortunately, the legislation does not contain a definition of ‘real risk of forfeiture’, which one can only regard as being somewhat remiss if that is going to be a key point at which tax is applied. But there were some examples given. If, for example, an employee had to be still in the company after three years, then he might be regarded as having a real risk of forfeiture or, if an employee gets to keep shares only if the company share price has risen over a designated period—namely, 18 months—and if the company share value has fallen, I presume at that time the employee might forfeit the shares. Where the share package is split, the tax benefit is also split. We were told that the Australian Taxation Office would regard the real risk of forfeiture as being greater than a mere possibility but less than a significant or substantial risk, all of which sounds rather woolly to me but I am sure that lawyers will spend a lot of time and have a lot of interest in making these definitions more focused.

There were some real criticisms of the Australian system of employee share schemes and these changes. Firstly, there was no consultation with industry prior to the changes and that was regarded as being very undesirable. Big companies, like Rio, which have enormous employee share schemes across the world, felt that they should have been consulted. It became apparent that there was very little data about employee share schemes operating in Australia, notwithstanding the fact that such schemes have proved to be so beneficial around the globe. It was thought there was a need for employee share scheme policy to be consistent with other reviews which are going on, such as that of executive remuneration, because often shares play a big part in executive remuneration. There was a view that Australian employee share schemes are inconsistent with those operating in other countries in some cases, such as this proposal that shares should be taxed at acquisition rather than when sold or when a person left the company.

Most importantly, a criticism was made that there has been no assessment of the impact on our economy as a whole of employee share schemes in spite of the fact that they have been found to be so useful in other countries, such as the United States and the United Kingdom. I think there is no doubt whatsoever in the minds of the people who are on the Economics References Committee that more needs to be done to highlight the value of employee share schemes and their potential value to the Australian economy.

Annette Hurley (SA, Australian Labor Party) Share this | Link to this | Hansard source

I want to explain the Labor senators’ dissenting report to the Economics References Committee’s report on the operation of employee share schemes in Australia. We were very concerned about the integrity of the Australian taxation system and were dismayed that the majority report paid little attention to the tax avoidance that has previously been carried on under the protection of employee share schemes and that the majority of senators did not appear to think that this was a significant problem. The government clearly does believe that it is a significant problem and that large-scale avoidance has been allowed to continue for far too long—mostly to benefit executives, who benefit from employee share schemes, not workers, who are entitled to small amounts under the employee share scheme.

Senator Pratt and I wrote the dissenting report. We are very supportive of employee share schemes as a way for businesses to encourage interest among workers in their own company and for workers to feel a part of the company, so there was no suggestion that employee share schemes do not have their value. But, as Senator Eggleston has just reinforced, to say that employee share schemes in Australia are not adequately promoted and highlighted and to suggest, as the majority report did, that they would be an alternative to our existing superannuation scheme is absolute nonsense.

In the US and the UK, from where the majority report got a lot of its evidence, there is no employer guaranteed superannuation scheme as there is in Australia, and that is causing those countries a great deal of trouble. The superannuation system in place in Australia allows employees to have superannuation which is broadly based over a range of companies; it is not unduly weighted on the company that they work for. This has caused severe problems in the United States when a company’s shares drop dramatically or when the company itself goes broke. The employees not only lose their jobs but also lose their superannuation. I was very disappointed to see in the majority report the suggestion of increasing employee share schemes to the detriment of our existing superannuation scheme.

The dissenting senators recognise the value of employee share ownership and of improving regulation to combat tax avoidance and to benefit Commonwealth revenues to the extent of $135 million over the forward estimates period, which would ensure equity and integrity and continued support for employees share schemes. Labor members strongly support the government’s measures on employee share schemes. I seek leave to continue my remarks later.

Leave granted; debate adjourned.