RECOMMENDATION

GOVERNMENT RESPONSE

Chapter 2: ESOPs antipodean fables: nature and rationale

1

The Committee recommends that the Government direct the Australian Taxation Office to conduct a study to determine:

• the number and type of employee share plans operating in Australia;
• the types of enterprise in which they operate;
• the number of employees in such plans;
• the value of holdings in those plans;
• the amount of revenue provided to the Commonwealth each year from the sale of employee share plan equities;
• revenue foregone by the Commonwealth through the operation of employee share plans; and
• the performance of these plans in attaining the public policy objectives set for them and in doing so, identify and report upon problem areas in plans operating both inside and outside Division 13A.

The Committee recommends that the Australian Taxation Office collect such information annually. The Government should consider the merit of making such information publicly available and, if so, on an annual basis.

The Government does not consider that the information specified in the recommendation should be collected by the Australian Taxation Office. The Employee Share Ownership Development Unit will be able to collect information about the barriers to further participation in employee share ownership.

2

The Committee recommends that the Government fund, on a contestable basis, independent, university-based research into best practice management in relation to employee share plans.

The Government supports the establishment of a development unit within DEWR. The Unit will have capacity to support research of this nature.

3

The Committee recommends that the Government develop, in conjunction with educational institutions and private sector industry groups, educational programs designed to make information about contemporary management practices available to small and medium unlisted companies, and companies in sunrise industries.

Noted. The Government supports measures to improve the skill development of the small business sector. There are a number of government programmes that provide practical assistance and encouragement to small businesses in adopting contemporary management practices. One example is the Small Business Assistance Programme part of which provides funding to service providers, such as industry groups and educational institutions, for projects that provide contemporary business skills training, mentoring and practical support for women in small businesses.

4

The Committee recommends that legislative measures should ensure that employee share plans are not used as an alternative to mandatory superannuation for general employees.

The Government supports the recommendation that the status quo is maintained in regard to compulsory superannuation and that employee share plans are not used as an alternative to this.

5

The Committee recommends that public policy should be formulated so as to promote employee share plans for the following purposes:

• to better align the interests of employees and employers;
• to develop national savings;
• to facilitate the development of sunrise enterprises; and
• to facilitate employee buyouts and succession planning.

The Government broadly supports the development of policy on employee share ownership to better align the interests of employers and employees.

6

The Committee recommends that the Government introduce a concessional taxation rate on up to 50 per cent of the proceeds of the sale of any equities acquired under an employee share plan that operates under Division 13A of the Income Tax Assessment Act 1936, and which is open to 75 per cent of a company's employees, where the taxpayer:

• invests, as a preserved contribution, up to 50 per cent of the proceeds of the sale of any equities acquired under such a plan in an approved superannuation fund in the participant's name; or
• invests in an approved trust structure established to provide income for a dependant, for the term of their legal dependency; or
• has reached retirement age or after, and uses the proceeds to fund retirement.

The Committee recommends that a maximum allowable limit should be applied in any one tax year. That limit should be set to advantage general employee share plans. The concessional tax treatment will apply only to that qualifying portion of the proceeds invested in the terms described. The nature and level of taxation concessions provided should be determined by the Government after consultation with appropriate industry bodies, the Employee Share Plan Advisory Board (see recommendation 9) and the Australian Taxation Office.

This recommendation is not supported.

Given the scale of tax concessions currently attached to superannuation and employee share acquisition schemes, the Government believes that further concessions along the lines proposed by this recommendation are not warranted.

7

The Committee recommends that a national review be conducted on the possible investment options, that could be encouraged in addition to compulsory superannuation, that would:

• increase national savings, and in the longer term,
• promote greater self-reliance in retirement.

Noted. The Government continues to monitor the operation of Australia's superannuation system with a view to ensuring that it continues to meet the needs of an ageing society, including the promotion of greater self-reliance in retirement. Superannuation remains a tax-preferred investment for all taxpayers. A number of the measures introduced by the Government in A Better Superannuation System provide further incentives for voluntary contributions to superannuation.

Chapter 3: Aligning interests: employee share plans and public policy

8

The Committee recommends that Parliament enact a single piece of legislation, bringing under one Act all laws governing employee share plans, their structure, taxation treatment, reporting and disclosure requirements. This legislation should apply to those plans presently operating under Division 13A as well as those plans that do not. The advice of relevant regulatory, industry and accounting bodies should be sought in undertaking this significant reform.

Advice from the Australian Government Solicitor has indicated that, for constitutional and practical reasons, it would be unwise to enact one central piece of legislation for Employee Share Schemes.

9

The Committee recommends that an Employee Share Plan Advisory Board be established:

• consisting of all relevant interests, including but not limited to: the Australian Taxation Office, the Australian Securities and Investment Commission and representatives of employers and employees; and
• to provide advice on the policies to be implemented in order to foster the widespread development of employee share plans amongst general employees and in sectors where uptake has been poorer, such as in small and medium companies and sunrise enterprises.

The Government does not accept the need for the establishment of a further body to provide advice on ESS.

10

The Committee recommends that the Department of Employment, Workplace Relations and Small Business establish an Employee Share Plan Promotional Unit. Its purpose would be to actively promote employee share plans, including assistance with design, implementation and the provision of information to both employers and employees.

The Government supports the establishment of such a unit within DEWR.

11

The Committee recommends that the Employee Share Plan Promotional Unit should aim, in cooperation with a proposed Employee Share Plan Regulatory Agency in the Australian Taxation Office, to develop and make available to employers and employees, model or off-the-shelf plans. This would reduce costs to smaller businesses while facilitating the uptake of employee share plans already approved by the ATO as being consistent with taxation provisions.

The Government supports the provision of information about schemes. This will be one of the roles undertaken by the Development Unit.

12

The Committee recommends that a minimum information list for employees be developed and specified in legislation for all employee share plans.

The Government supports this recommendation; however, legislative provisions for minimum information requirements are already contained in the Corporations Act 2001. The Development Unit will prepare a plain English minimum information list, in consultation with other relevant agencies.

13

The Committee recommends that the Australian Taxation Office receive an additional, specific appropriation to fund investigation of the promoters of aggressive tax schemes. Further consideration should be given to appropriations in support of ATO-initiated legal action should this be supported by the outcome of systematic inquiry.

The ATO currently has resources allocated to examining the affairs of promoters of aggressive tax schemes, including employee benefit arrangements. The level of resources allocated to examining promoters has been determined in accordance with the ATO's risk assessment process having regard to the relative priorities of all areas of risk. The level of resources allocated to this function will continue to be assessed annually, on the basis of those relative priorities.

14

The Committee recommends that the Government consider that a cap be applied to salary sacrifice arrangements when foregone salary is contributed to an employee share plan qualifying under Division 13A. Further concessional arrangements should apply to sunrise industries, small and medium businesses where the Share Plan Regulatory Agency recommended elsewhere in this report is satisfied that the employee share plan is a bona fide employee buyout. This arrangement would apply for a defined period of time to be negotiated between the Government, the regulatory agency and relevant industry bodies.

The Committee further recommends that the Government give consideration to requiring all sacrificed salary in executive-only or non-13A plans be assessable in the income tax year in which the sacrificed salary was earnt, having conducted first an analysis of its impact on corporations, especially their ability to attract and retain key personnel.

Any substantial changes to the taxation treatment of executive remuneration packages should be phased in and prospective.

The recommendation is not supported.

The Government considers that issues relating to the amount and composition of employee remuneration are matters which are more appropriately left to employers and employees to determine.

15

The Committee recommends that the Government establish an independent inquiry to examine:

• the extent to which FBT exemptions are being used to develop and underwrite executive salary packaging, the cost to revenue and the economic benefits, including the attraction and retention of key personnel;
• the merit of plans, open to executives only, which operate on a salary sacrifice basis or on low or no interest loans, or which use various FBT exemptions, to continue to operate as they stand;
• whether limits should be placed on the amount of salary that may be sacrificed, the size of a low or no interest loan that may be accepted, or the amount of FBT exemption that may be allowable, without the value of the benefit being treated in the same way as cash income; and
• whether sunrise enterprises should be given access to concessional taxation treatment in respect of the FBT liability or the taxation treatment of salary sacrifice and company provided loans.

The Government believes that the current tax arrangements are appropriate.

The fringe benefits tax (FBT) system is designed to ensure that salary packaging results in no overall loss to Commonwealth revenue, with employees being subject to income tax on the wage or salary component of their remuneration package and employers paying FBT at the top marginal personal tax rate on the non-salary component. The major forms of non-salary remuneration not dealt with under FBT are given treatment under alternative taxation regimes, such as those which apply to superannuation and to employee share discounts.

16

The Committee recommends that the Attorney General prepare a discussion paper for public consideration, on the issues surrounding the clarification of the powers of the Commissioner for Taxation in relation to the discovery of information concerning aggressive tax planning schemes. This would include information held by legal practitioners. Particular consideration should be given to ensuring that information collected is used only for the detection and prevention of aggressive tax planning.

The Treasurer and the Commissioner of Taxation have confirmed that aggressive tax planning schemes are being dealt with effectively under the Part IVA anti-avoidance provision of the ITAA36.

17

The Committee recommends that any legislation providing for employee share plans contain a preamble that clearly articulates the public policy goals intended by Parliament.

The Committee recommends that the Commissioner for Taxation and any other regulatory authority be required to take notice of, and give effect to, this preamble in their rulings in respect of employee share plans legislation.

The recommendation refers to the proposed standalone legislation for employee share plans which, based on AGS advice, cannot be enacted.

18

The Committee recommends that:

• an Employee Share Plan Regulatory Agency be established, by legislation and operate under the aegis of the Australian Taxation Office;
• the agency should be established as an element of any consolidated employee share plan legislation; and
• the agency's responsibilities should be to:

1. administer any employee share plan legislation;

2. monitor the operation of employee share plans;

3. advise appropriate regulatory authorities so that the intent of the legislation can be attained;

4. advise government of improvements to legislation that would facilitate the creation of employee share plans while at the same time reducing opportunities for their use other than for purposes intended by Parliament. This would include, but not be limited to, defining small, medium and sunrise enterprises and establishing criteria for determining what constitutes an aggressive tax planning scheme; and

5. develop, in consultation with stakeholders, a number of model plans with known taxation consequences, and provide these to the Employee Share Plan Promotional Unit in the Department of Employment Workplace Relations and Small Business, recommended elsewhere in this report.

The Government does not accept the need for a separate regulatory agency.

19

The Committee recommends that:

• all employee share plans operating in Australia be registered with the regulatory agency and be given a unique identifying number, whether or not they operate under Division 13A or some other arrangement;
• registration of employee share plans involve providing to the regulatory authority the following information:
  • the names of participants;
  • the type, number and value of equities provided;
  • the method of valuing equities;
  • the rules of the plan and how it operates and is administered;
  • the duration of the plan;
  • any concessions provided to the plan; and
  • the number of times equities have been issued under the plan;
• taxpayers be required to disclose on their tax returns their participation in employee share plans; and
• data be collected, on an annual basis, as to the number and types of membership, size of employee share plan and other operational details.

The Government does not accept the need for a separate regulatory agency.

In addition, the Government does not consider that participation in employee share schemes should be reported in individuals income tax returns as this would add significantly to the complexity of individual return arrangements for reasons that are not related to the effective collection of revenue. In addition, as the data would be provided by taxpayers, information on the characteristics of the firms offering ESS and the type and nature of those schemes would not be known

The Employee Share Ownership Development Unit will be able to collect information about the barriers to further participation in employee share ownership.

20

The Committee recommends that the regulatory agency be empowered to declare that a certain share plan has a primary purpose beyond that intended by Parliament. The agency should be empowered to make an assessment in respect of the income and/or equities in the plan.

As above.

21

The Committee recommends that:

• the Government re-examine the underlying policy of private binding rulings, and consider options for increasing the transparency of such rulings; and
• the feasibility of posting rulings issued in respect of employee share plans on the Australian Taxation Office internet site should be examined, provided that no taxpayer identifying information is provided.

The Government notes that the Commissioner of Taxation commissioned a review by Mr Tom Sherman AO of the systems and procedures relating to the issue of private rulings by the ATO.

As a result of one of the recommendations of the Sherman Report the ATO now publishes edited versions of all written binding advice it issues on the Register of Private Binding Advice that is available on the ATO website. This register deals with all applications for binding advice received after 31 March 2001 (except for GST specific private rulings for which relate to applications received after 30 June 2001).

The advice is edited to protect the secrecy and privacy of the person or entity to which it was given. The ATO publishes edited versions of this advice to improve the integrity and transparency of the private ruling system.  However, only the person to which the private ruling relates can rely on the advice that is contained within it.

All written binding advice issued by the ATO is required to be based on an ATO precedential decision. Those precedential decisions are contained on the ATO Legal database that is available on the above ATO website.  Taxpayers who are seeking an indication of the Commissioner's view on the application of the law in particular circumstances can search this database.  Should they wish to do so they, of course, can apply for a private ruling.

22

The Committee recommends that the Employee Share Plan Regulatory Agency, or failing the creation of such an agency, the Commissioner for Taxation, be provided with a discretionary power to waive sections 139CD(3) and 139 DD(3) of the Income Tax Assessment Act 1936, provided that:

• the plan in question would otherwise satisfy Division 13A;
• the Commissioner is satisfied that the plan is not being used and will not be used for aggressive tax planning; and
• there is another plan operating under Division 13A, but open to 75 per cent of employees, with an uptake rate of more than 50 per cent and no disincentive conditions, that is offered at the same time and in respect of which the same exemption is sought.

[139CD(3) & 139DD(3) - the qualifying condition that the company is the employer of the taxpayer or a holding company of the employer of the taxpayer.]

This recommendation is not supported. The Government considers that allowing individuals other than employees to benefit from ESS tax concessions would be inconsistent with the broader policy objectives of aligning the interests of employees and employers.

23

The Committee commends the draft Registered Organisations Bill 2000 to Parliament and recommends that any legislation dealing with employee associations, provide explicitly:

• for membership of employee share plans;
• that when the members of a plan are also members of an employee association, the eligibility for registration of that association; and
• for the protection of the freedom of choice of employees who participate in enterprise associations and also participate in an employee share plan.

The Workplace Relations Amendment (Registration and Accountability of Organisations) Act 2002 was passed by the Senate on 16 October 2002 and amends a number of provisions of the Workplace Relations Act 1996 (WR Act) relating to registered organisations. Amendments in relation to enterprise unions and employee share plans had been included in the relevant Bill as introduced but were not included in the Bill as passed; if such amendments proceed it is expected that this will occur through separate single issue legislation.

24

The Committee recommends that the Government refer to the Employee Share Plan Advisory Board the question of whether taxation concessions available to employers for establishing qualifying employee share plans be conditional upon there being a non-interference clause inserted in the qualifying conditions in Division 13A. The intention would be to provide explicit guarantees for the freedom of choice and association of employers and employees.

The Government supports this recommendation; however, further response is not required as it is already covered by the freedom of association elements of the WR Act.

25

The Committee recommends that employees and employers be permitted to reach an agreement to trade wages and conditions (but not superannuation entitlements) for participation in an employee share plan so long as the following conditions are met:

1. the agreement is part of a reasonable strategy to deal with a business crisis;
2. the agreement is not contrary to the public interest;
3. the agreement involves full disclosure of the company's situation and risks that can reasonably be known;
4. the negotiations leading to the agreement involve an independent assessment that the strategy is soundly based;
5. the participants negotiate free of duress; and
6. any agreement struck should be ratified by an independent arbiter, such as the Australian Industrial Relations Commission or the Office of the Employment Advocate.

The WR Act already provides sufficient flexibility to allow employers to develop agreements to assist in addressing a business crisis, while maintaining appropriate protections through the No Disadvantage Test (NDT). This is applied to all agreements made under the WR Act and ensures that the agreement does not reduce the overall terms and conditions for employees. Where employee shares form part of the remuneration package for an employee or employees, those shares could be taken into account by the AIRC or Employment Advocate (EA) in applying the NDT, the assessment of the value of employee shares in such a situation would be a matter for the AIRC or EA. However, an agreement may be approved even if it fails the NDT if the AIRC is satisfied that the agreement is part of a reasonable strategy to deal with a business crisis and is not contrary to the public interest. For example, the Greyhound Pioneer 1998 agreement, which contained an ESS, was approved under the public interest test.

Whilst ESS would allow for some fluctuation in earnings (as with normal performance bonus arrangements), their use would be supported as an addition to, rather than a substitute for award wage entitlements.

Chapter 4: Administration and Taxation Arrangements

26

The Committee recommends that the Government clarify the taxation treatment of trust arrangements that are used to operate bona fide employee share plans established under Division 13A, and legislate specifically to exempt such trusts from proposed entity taxation provisions.

The Exposure Draft to the New Business Tax System (Entity Taxation) Bill 2000 was withdrawn