9 June 2009 - 14 September 2010
the Australian Employee Ownership Association
Unions NSW Auditorium, Sydney
10 December 2009
Good afternoon and thank you to the Australian Employee Ownership Association for inviting me to speak today.
I suppose it's getting close to that time I should also wish you all a Merry Christmas and a Happy and Safe New Year.
This past year has been an active one in your area, with the Government introducing major taxation reforms.
I have met some of you during consultations in the reform process to employee share schemes.
When the Government undertook its consultation process this year, the Australian Employee Ownership Association and its members provided valuable input.
I commend and thank your Association for its engagement with the Government in this important policy area and the leadership it continues to show in promoting employee share schemes and employee ownership.
We go into 2010 with the Senate having just passed the legislation announced in the May Budget and reshaped to take into account your concerns and ideas.
There is still some work to do – but I want to restate the Government's support for employee share schemes.
I want to assure you the comprehensive consultation processes we have already undertaken to develop these reforms will continue.
I also want to explain how the Government's reforms to the taxation of employee share schemes fit into a broader agenda to encourage good corporate governance, increase Australian productivity and return the Budget to surplus in the wake of the global financial and economic crisis.
The Government values employee share ownership
The Government values employee ownership in Australia. Giving employees a stake in the ownership of the company they work for helps ensure employers and employees are working towards the same goals.
It 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.
Most importantly, it means employees share in the wealth and successes created through their hard work.
For these reasons, the Government encourages the continued growth of employee ownership in Australia and continues to support employee share schemes through valuable tax concessions.
The path to reform
The process of developing the reforms that have been progressed during the past six months has not always been smooth – but in those six months we've managed to come together and settle most points of difference.
The changes to the taxation of employee share schemes were part of a package of reforms announced in the May Budget to improve the fairness and integrity of the tax system.
We needed a set of changes that continued the Government's strong support for employee ownership, while protecting the integrity of the tax system by addressing some of the concerns identified by the Tax Office.
It is important to maintain this balance.
Soon after the Budget announcement, it became clear the Government needed to work together with industry stakeholders, such as the Australian Employee Ownership Association and its members, to refine the stated policy.
As a result, we undertook a comprehensive consultation process, we listened to stakeholder concerns and made changes.
On 5 June this year, three weeks after the Budget, the Government issued a public consultation paper which sought to better understand public concerns and canvass a number of further options to improve the taxation of employee share schemes. The Government received 65 submissions in response to this paper.
On 1 July, I announced the revised final policy statement.
On 14 August, the Government released an exposure draft of the legislation and explanatory materials that was to give effect to the policy statement. Around 25 submissions to that consultation were received.
At my request, consultation was also undertaken by the Board of Taxation to ensure the legislation would give effect to the announced policy.
On 15 September, exposure drafts of the application and transitional provisions were released for public comment and a number of further submissions were received.
Throughout this process, the Treasury continued to consult on technical issues with industry representatives and experts.
The final legislation
The final legislation includes a number of measures to boost the integrity of the tax system – including the introduction of reporting requirements. Employers who provide employee share scheme benefits will now have to provide information to the Tax Office.
Employer reporting will address concerns that employee share schemes weren't always properly taxed. It may also allow the Tax Office to pre‑fill electronic tax returns, making it easier for employees at tax time.
In my travels and in my discussions, I haven't heard a single voice raise concern with this key component of the reforms.
In addition, the reforms target the $1,000 upfront tax exemption to those low and middle-income employees who need it most, by applying a $180,000 means test.
The reforms also continue to support the long-term alignment of employer and employee interests by providing for deferral of tax.
Most deferred tax schemes will now require shares or rights provided to be at risk of being forfeited. This requirement is consistent with the global corporate governance movement to place employees' remuneration 'at risk', ensuring that employees have real 'skin in the game' and are motivated to work for the long-term interests of the company.
I believe that requiring schemes to offer genuine loyalty or performance conditions to gain access to deferred tax will improve Australia's long-term workplace productivity. Under the new rules, tax will be deferred until the employee is able to sell or dispose of their shares or rights, until they cease employment, or for a maximum of seven years.
To ensure that many of the existing salary sacrifice schemes are able to continue with a minimum of disruption, the Government has also provided for a new arrangement for deferral of tax in salary sacrifice schemes without a risk of forfeiture, up to a maximum of $5,000 worth of shares per year.
These schemes are capped at a $5,000 limit to promote fairness in the tax system, providing a relatively more attractive concession to lower and middle income employees. Tax in these schemes will be deferred until any restrictions on the sale of the shares or rights are lifted.
The new rules have broadened some of the rules relating to refunds of tax. Previously, a refund of any tax paid was available in respect of forfeited rights to shares, but not for shares themselves. The Government has broadened these refund provisions to ensure a refund is also available in respect of shares.
The Government has also removed anomalies in the capital gains tax provisions that resulted in legitimate costs incurred in running or participating in employee share schemes not receiving any recognition.
At the same time, the Government has also narrowed the refund provisions.
A refund remains available in respect of shares or rights forfeited due to a failure to meet genuine performance conditions, or because the employee leaves employment – but a refund will not be available in situations where the refund has the effect of protecting an employee from downside market risk. This is a fair outcome both for employees and for the integrity of the tax system.
The previous law resulted in unclear or anomalous tax outcomes in certain areas, many of which were identified by industry stakeholders in consultation. The new rules provide clarity in these areas.
The Government has also included transitional arrangements for shares and rights acquired prior to 1 July this year to ensure the previous taxing points and refund provisions will be preserved. These transitional arrangements provide certainty to those employees previously participating in deferred tax employee share schemes.
Further Government consultation
The comprehensive consultation process I mentioned earlier has resulted in effective and workable tax law that will continue to support employee share schemes, while also protecting the integrity of the tax system.
But the work isn't finished. I have 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.
I have asked the Board of Taxation to report its findings in relation to these issues to me by this coming February.
Of course, I also remain committed to further engagement and consultation with the business sector and the Australian community on the future of employee share schemes.
ESS and the broader Government agenda
I'd now like to set out how the Government's reforms to employee share schemes are a part of a larger agenda of ensuring fairness in the tax system, improving workplace productivity, encouraging good corporate governance outcomes and returning the budget to surplus.
1. Returning budget to surplus
The Government has committed to a deficit exit strategy, which requires real spending growth be restrained to 2 per cent a year once the economy is growing above trend, until the Budget is returned to surplus. The Government has also committed to offset all new spending initiatives by finding savings elsewhere in the Budget.
Treasury's mid-year economic forecasts (MYEFO) released last month showed the Government had achieved this restrained spending objective. Since the Budget, the Government has more than offset all new spending over the forward estimates.
Another part of this plan for Australia's recovery is ensuring the continued integrity and fairness of our tax system. The reforms to the taxation of employee share schemes are a component of this.
By reducing the opportunities for confusion on the part of the taxpayer, and outright tax avoidance, the current reforms to the taxation of employee share schemes will deliver an extra $135 million to the Budget bottom line over the forward estimates.
2. Corporate governance
The employee share scheme reforms are also an important part of improving corporate governance arrangements in Australia.
By continuing to provide for deferred taxation in employee share schemes, and introducing a requirement for deferred tax benefits to be at risk of forfeiture, the scheme reforms will help encourage good corporate governance in Australia. But this is just one of the steps the Government is taking to improve corporate governance.
3. Remuneration reforms
Many Australians are rightly concerned about the remuneration packages being paid to directors and senior executives in some Australian companies.
The Government believes company boards must be accountable to shareholders for their remuneration decisions. Critical to this is a robust regulatory framework that promotes transparency and accountability on remuneration practices and better aligns the interests of company directors and executives with those of shareholders.
The Government is committed to taking all appropriate steps to ensure the framework regulating the remuneration arrangements of directors and executives is robust, workable and consistent with the best interests of the Australian community.
That is why the Government has taken action on termination benefits, or 'golden handshake' payments.
Such payments are given to outgoing company directors and executives at a time when they are no longer able to influence the company's future performance.
The Government has enacted legislation which empowers shareholders to more easily reject such payments where they are not in the interests of the company or the shareholders.
The previous thresholds allowed termination benefits to reach up to seven times a person's total annual remuneration before shareholder approval was required.
This was a very high threshold, which left shareholders powerless to stop excessive termination benefits. The Government's reforms address this, by substantially lowering the threshold required for shareholder approval to one year's base salary. This provides shareholders with the ability to scrutinise and reject excessive termination benefits.
The reforms also expand the scope of individuals covered by the regulatory regime, improve the integrity of the shareholder vote, facilitate recovery of unauthorised termination benefits and substantially increase the relevant penalty provisions.
The legislation took effect on 24 November. But this is not the Government's only measure to tackle excessive remuneration and corporate greed.
4. Productivity Commission report
In March this year, the Government tasked the Productivity Commission and Professor Allan Fels with undertaking a broader review of Australia's remuneration framework, including some aspects of employee share schemes.
The Government welcomes the Commission's draft report which was released in September. I note that the Commission has accepted further submissions and has conducted additional public hearings and will finalise its report this month.
I look forward to working through community feedback and the Commission's final recommendations in relation to executive remuneration.
It would be remiss of me not to mention before I conclude, the location where we are meeting tonight.
Now known as the Unions NSW Auditorium, it has a great history as the Trades Hall, the heart of the Labor movement in this great State. It goes back a long way – before the 40-hour week, workers compensation and other standards we take for granted these days.
This isn't meant as a nostalgic tribute to the movement from which I originally came.
It's a reminder of how the interests of workers and employers, often pitted in conflict and confrontation in the past, have in many areas merged in our contemporary world.
I dare say there would be many spirits in this place who would never have imagined their members being able to own a part of their companies and who would be delighted at this reality.
Employee share schemes are a prime example of how benefits can be shared between employer, employee and society.
I consider the productivity gains to be made from continued and increasing employee ownership to be important to Australia's future.
By aligning the interests of employees and employers we can increase our capacity to maintain a higher standard of living. But incentive schemes must be fair.
The Government's reforms to employee share schemes will allow us to continue to encourage employee ownership in Australia, while protecting the integrity of the tax system.
The Government will continue to work with business to encourage employee ownership in Australia.
Awards for ESOP of the year
Finally, I thank the Australian Employee Ownership Association for the pleasure of presenting the employee share ownership plan awards of the year.
Thank you and again, Merry Christmas and a Happy and Safe New year.