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Wednesday, 31 August 1994
Page: 736

Senator Cook —On 30 June 1994 (Hansard page 2440) Senator Kernot asked me a question without notice concerning Employee Share Ownership Schemes. The Treasurer has provided the following additional information in answer to the honourable senator's question:

  The changes to the taxation of employee share acquisition schemes announced by the Government were prompted by the emerging exploitation of the previous tax provisions which provided scope for virtually unlimited tax deferral on remuneration channelled through employee share acquisition plans.

  Section 26AAC of the Income Tax Assessment Act 1936 was introduced in 1974 in the context of seeking to ensure that fringe benefits were properly subject to income tax. Since that time there have been major changes to the taxation system, including the introduction of Fringe Benefits Tax (FBT) and Capital Gains Tax (CGT).

  With the broadening of the tax base reducing other opportunities for minimising taxation on remuneration, there was scope for section 26AAC to be increasingly used as an avenue for deferring taxation on large amounts of remuneration over long periods of time. Such opportunities were likely to provide the greatest opportunities for high income earners who would be in the best position to place large amounts of funds in employee share schemes for long periods of time.

  Furthermore, schemes had been developed which allowed participants to defer tax on remuneration through arrangements that did not involve employer company shares but rather operated as general investment vehicles. Such arrangements did nothing to encourage employee participation in the ownership of their employer company.

  In 1988, the Government introduced a tax exemption on up to $200 of share remuneration a year to employees for discounts on shares in their employer company. However, there were concerns that this concession may have been unattractive to employers because:

  The tax exemption was only provided on up to a 10 per cent discount; that is, in order to access the full $200 exemption employees had to outlay $1800 to purchase $2000 of shares.

  In addition, the $200 was effectively clawed back through the CGT upon sale of the shares.

  Section 26AAC therefore provided an inequitable tax deferral opportunity without a set limit on the amount or time of the deferral, as well as a $200 exemption concession that may not have provided

an effective incentive in promoting the Government's policy objective of encouraging employee equity participation in employee companies. Such schemes can have significant industrial relations benefits and can be expected to play a useful role in enterprise bargaining.

  The changes announced in the Budget will subject remuneration provided to employees through employee share acquisition plans to FBT as is the case with other forms of non-cash remuneration, but with two forms of concessions.

  Schemes which provide employee remuneration in the form of shares in an employer company will benefit from the following tax concessions: An FBT exemption in respect of share remuneration of up to $500 a year per employee; or tax deferral for up to 10 years in respect of share remuneration of up to $1,500 a year per employee.

  This removes the scope for unlimited deferral that was likely to have provided the greatest advantage to high income earners.

  The exemption concession has been improved to ensure it is effective. This has been achieved by making four key changes.

  The maximum exemption has been increased from $200 to $500.

  The maximum discount allowed has been increased from 10 per cent to 100 per cent, so that now no outlay by the employee is necessarily required.

  The amount of the FBT exemption ($500 in this case) will be allowed as a tax deduction to the employer.

  The CGT cost base will be adjusted to include the $500 exemption to ensure that the exemption is not clawed back by CGT upon sale of the shares.

  The concession schemes will be subject to a range of conditions to ensure they improve workplace productivity and are equitable to all employees.

  Together these changes will ensure that significant and appropriately targeted concessions will be available to employee share acquisition plans.

  The new arrangements represent a clear improvement in the taxation of employee share acquisition plans, by ensuring that the tax concessions in this area are provided equitably and in a way that can be expected to provide industrial relations benefits through employees participating in the ownership of their employer company.