On 19 February 2004 the International Accounting Standards Board (IASB) issued International Financial Reporting Standard 2 Share-based Payment. Under this new international accounting standard companies will be required to expense the fair value of options granted to employees and third parties.
The IASB's proposed changes have raised the question of whether a corporate tax deduction should be made available for the cost of options granted to employees. This would include the cost of options issued over unissued shares.
Broadly, under the current law an income tax deduction is not available as the normal basis for providing a taxation deduction is that a business has incurred an economic loss or outgoing. It is the Government's view that the current treatment should remain and that there be no new income tax deduction for the issuing of options.
Under current law, deductions are allowed for certain qualifying options issued under employee share schemes. The Government recognises the important role of existing concessional taxation arrangements for qualifying employee share schemes play in aligning the interests of employees and employers, and these arrangements will not change. Allowing a deduction for options issued to employees beyond the concessions currently available for employee share schemes would have a significant negative impact on Government revenue.
In reaffirming the current taxation treatment, I note the raft of positive reforms contained in the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Bill 2003, which was introduced into Parliament on 4 December 2003. The Bill is designed to improve the operation of the market by promoting transparency, accountability and shareholder activism. The Bill takes a balanced approach to corporate regulation, containing measures to enhance auditor independence, achieve better disclosure outcomes and improve enforcement arrangements for corporate misbehaviour, whilst still fostering innovation and wealth creation. In relation to remuneration, the Bill promotes constructive communication between shareholders and boards to empower shareholders to exercise their rights where they disagree with the boards’ remuneration policies and practices.