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Employee share options: the taxing uncertainty

The global economic crisis has brought with it a close scrutiny of all manner of executive and employee remuneration arrangements. However, in the context of employee option plans, one of the most contentious and vexing issues for a recipient of options under an employee option plan is whether to elect to pay tax upfront on the value of the options under s 139E of the ITAA 1936 or defer the tax until exercise of the options.

Dealer groups urged to keep the faith

In the wake of falling share values, industry representatives are calling on financial planning dealer groups to keep faith with share option schemes as a way of remunerating advisers.

Employee Shares In Volatile Markets

A recent report in the Australian Financial Review quoted a recent survey of employee share option plans, which concluded that almost 75% of options issued by the 50 ASX.

Employee Share in Hard Times

In the current "tough" economic circumstances, as strategic remuneration practitioners, we have noticed a trend for companies to opt out of employee share option-based remuneration and replace that equity with ongoing, fixed, salary entitlements.

Share Option Plans Worthless

Almost three quarters of employee share options plans issued by the top 50 ASX-listed companies since 2003 are now worthless, research by the law firm Deacons has found.

Options Pain: executives drop billions in shares slump

The bear market has stripped billions of dollars from the wealth of the nation’s senior executives as the value of stock options plunges, increasing pressure on boards to scrap the controversial practice and find new ways to keep their senior staff motivated during the downturn.

Taxation of employee share options – what is in store?

On 1 May 2008, the Treasurer stated that the Government would close a 'loophole' which allows employees to pay the tax upfront on the acquisition of options on a lower value. The Treasurer's comments appear to have been made as a "doorstopper" in the context of delivering family friendly tax reform in the Budget and were rather thin on detail: see 2008 WTB 18 [639].

Employee Share Plans in Interesting Times

Recently, the company secretary of a large listed company sought urgent assistance regarding participants in their employee share plan. Employees were proposing to self assess for income tax on the exercise of their performance rights, issued to them by the company as a part of a key employee, long-term incentive program.

Not Just a Game – footballers and management fees

In what must be a first for the Federal Court, and for the competing and rival football codes of Australian Rules and Rugby League, Gordon J has ruled in 2 separate cases that the payment of management fees by professional, full-time football players to their respective managing agents were tax deductible under s 8-1 of the ITAA 1997. See also report at 2007 WTB 50 [2222]. The cases were:

sharing the gains

The concept of employee profit sharing is not particularly new, as schemes to align employee and shareholder interests were introduced as far back as the 18th century. With skin in the game, the theory suggests that employees are more likely to take a long-term view of the business and think about company issues from a shareholder’s perspective. This should, in turn, lead to better outcomes for the business and its stakeholders.

The astonishing Indooroopilly case

In unanimous findings of 3 judges in the Federal Court...

The Slade Bloodstock case - a disturbing decision

Any person acting in the position of a director, office holder, employee and shareholder of a company, especially in an SME, should be following with concern the decisions in the AAT.

ASIC SPOT CHECK

Australian Securities and Investments Commission (ASIC) will be conducting "Spot" checks on the value of options and other employee equity disclosed in the accounts of companies listed on the Australian Stock Exchange.

Geared ESOPs

Contrary to the prevailing presumption that ESOPs cannot be effective capital raising exercises, RSG has developed the Geared ESOP in Australia as a key business, financial and succession planning vehicle for business owners and their employees. <click here> to read Gary Fitton’s landmark article in Thomson’s ATP, in which he explores the attributes of this important development in employee share plan design.

The Section 139E Election

For employees participating in employee share or option plans, the decision of whether and when to make a section 139E election to be taxed upfront is a decision which all employees need to make. <click here> to read to read Gary Fitton’s article, published in Thomson’s ATP, where he explores the issues surrounding this decision in the light of a recent Federal Court decision.

Pay and Share Options in the New World

RSG has developed an employee equity valuation calculator to measure the value of options, which meet rigorous new accounting expensing and remuneration disclosure requirements. To read Gary Fitton’s article on how options are valued to form a vital part of total remuneration packages. <click here>

RSG Employee Equity Calculator

RSG, in conjunction with a leading academic specialising in option valuations, have developed an employee equity valuation calculator, which accurately determines the value of employee share and option benefits, in line with the requirements set by the Australian Accounting Standards Board (AASB). These valuations will form the basis for:

1. Communicating share and option benefits to employees as part of their total remuneration packages;
2. Disclosing and expensing of those benefits in the company’s annual accounts; and
3. Determining the amounts which can be paid and reasonably claimed as tax deductible contributions to a dedicated employee share trust.

In many companies, the preparation of their accounts for the year ended 30 June 2005 will be the “crunch” day for the valuation of employee share and option benefits.

To read a recent article on this topic from the Australian Financial Review, please <click here>

What do clients say about RSG?

Palm Springs is featured on the DEWR website as an example of a successful general employee share plan. Here is what they say about their plan and RSG.

“…I have no doubt our share plan has benefited our firm through closely aligning employee and shareholder interest…”

“… We engaged the services of a specialist share plan consultant [RSG]… The benefits of using such a professional, who can tailor the plan specifically to your business’ needs and bring their wealth of experience to bear, far outweigh the costs of this service”

To read more, please <click here>

High Performance Workplace

Recent studies have demonstrated that high performance workplaces adopt a Partnership Approach to the achievement of organisational objectives and exceptional performance, characterised by:

• High employee involvement;
• Dynamic Human Resource practices; and
• Effective employee reward and commitment as a stakeholder.

Please <click here> to read more about the Partnership Approach.

Time Games: The Extension of Time to Make a Section 139E Election

In an article published in Thomson’s Weekly Tax Bulletin, Gary Fitton, a Director of RSG, reviews the pitfalls and remedies for employees unaware of the taxation requirements for participation in their company’s employee share plan, and seeking to access the taxation concessions and exemptions the Government has implemented to encourage employee share plans.

To read the article, <click here>