- Major changes to the taxation of employee share-based remuneration announced in last night’s Federal Budget will make employee equity a much less attractive form of executive remuneration.
- Employees will now be taxed on shares and options in the year of grant rather when they vest. Although the details are still unclear, this is apparently regardless of any vesting conditions or sale restrictions.
- The changes may provoke a sudden shift toward cash-based arrangements for senior executives and have implications for existing contractual arrangements.
- Changes to the taxation of foreign income for Australian residents may also effect cross-border contractual arrangements for employees who carry out duties across jurisdictions.
- For the first time in Australia, government funded paid parental leave will be offered for primary carers of a child born or adopted after 1 January 2011.
- There will be a reduction of the cap on employer superannuation contributions (which includes salary sacrificed contributions). From 1 July 2009 the cap will be $25,000 instead of $50,000 for employees under age 50. If an employer makes contributions for an employee above this cap, a tax rate of 46.5 per cent applies to the contributions instead of the usual 15 per cent.
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Cash is king – the end of employee share plans? Tax breaks abolished in the Federal Budget herald big changes for executive incentives
Tax treatment of employee equity schemes
Last night’s Federal Budget included surprise measures which will have a significant impact on the structure of executive remuneration in Australia.
With effect from 7.30pm last night, 12 May 2009, it will no longer be possible to defer tax on qualifying shares and options granted to employees. Employees will now be taxed on the value of shares and options in the year they are granted. It appears that this will be the case regardless of the conditions or restrictions on vesting or sale attached to the grant. We await more detail including as to:
- the position if the grant subsequently fails because conditions or restrictions are not met. (Under the current law, if the grant ultimately falls through, in some circumstances an employee would not be able to recoup the tax already paid on the grant), and
- whether the taxable value of the shares or options will be discounted to recognise conditions or restrictions on vesting
While existing shares and options should not be affected, it is not yet clear whether the new taxation rules will apply to offers that are currently outstanding.
$1,000 exemption
The existing $1,000 exemption for certain employee share benefits will be restricted to employees with a taxable income of no more than $60,000.
Foreign income
At present, foreign earnings of an Australian resident taxpayer referable to a period of at least 91 days’ continuous employment in a foreign country are generally exempt from Australian tax.
From 1 July 2009, this exemption will only be available to a very limited number of occupations including aid workers, charitable workers and certain government or project work carried out in the national interest.
Australian resident taxpayers will still be entitled to offset foreign tax paid so as to avoid double taxation, but will have an additional compliance burden. Where dual employment contracts have been set up to recognise an employee’s performance of duties in different countries, employers should consider reviewing the arrangements and seeking tax advice where applicable.
Implications for employment contracts
Two immediate implications to consider are:
- how employers should deal with existing contractual entitlements to grants of shares or options, and
- potential alternatives to structuring employee remuneration (for example, shadow equity plans, cash plans, employee share loans) without losing the critical link between pay and performance.
Introduction of government funded paid parental leave
For the first time in Australia, government funded paid parental leave will be offered for primary carers of a child born or adopted after 1 January 2011. It will be available to primary carers earning less than $150,000 who have been engaged in work for at least 10 of the previous 13 months, for an average of one day per week. The scheme will cover employees, including casual workers, contractors and self employed people. The government will pay 18 weeks paid at minimum wage or $543.78 per week. In most cases the payment will be made through the employer. In most cases, employees receiving paid parental leave will not be eligible for the baby bonus or family tax benefits during the period.
The scheme is based largely on the recommendations of the Productivity Commission. Given the global economic crisis, there was a real risk paid parental leave might be omitted from this budget, so the proposed scheme is a reasonable starting point for a country which has never had legislated paid parental leave.
The government has not implemented the recommended two weeks partner leave which was intended to encourage fathers or partners to take time off work near the birth of the child. While this is disappointing for men who often use their annual leave at that time, it reflects current practice, where only very few employers offer paid paternity leave. The new scheme also does not presently compel employers to pay superannuation contributions during the leave period, however the Australian Taxation Office has indicated that this is subject to clarification and review by the government.
Already many large leading private employers and public sector employers offer paid maternity leave, usually at full pay for periods of between 6 and 14 weeks, often conditional on return to work.
The introduction of this paid parental leave scheme complements the enhanced employment benefits for parents introduced in the National Employment Standards which will commence in January 2010.
Implications for employers
This new scheme may influence leading employers to reconsider their programs and offer enhanced benefits above the government scheme, for example to:
- offer paid parental leave for the primary carer (many only pay mothers maternity leave)
- increase the period of leave to 18 weeks (most range from 6–14 weeks)
- offer to make up the wage gap between minimum wage and a person’s actual wage (as done by many employers for workers compensation payments)
- offer to make superannuation contributions for the leave period (even though not mandated to do so)
- offer the same benefits for employees earning over $150,000
- implement these enhancements well before the January 2011 introduction date, or
- offer 1–3 weeks paid paternity leave (although this is also not mandated).
Reduction in the cap on employer superannuation contributions
The government last night also announced a reduction of the cap on employer contributions (which includes salary sacrificed contributions). From 1 July 2009 the cap will be $25,000 instead of $50,000 for employees under age 50.
For employees over 50, the transitional concessional superannuation contributions cap will be reduced from $100,000 to $50,000 per annum, with the cap fading out as originally proposed in the 2011–12 year.
The government also announced that the existing grandfathering arrangements concerning the application of the concessional caps to members with defined benefit interests will continue.
Implications for employers
- If an employer makes contributions for an employee above these caps, a tax rate of 46.5 per cent applies to the contributions instead of the usual 15 per cent.
- A substantial incentive exists for employees to take maximum advantage of the present concessional cap levels, prior to 1 July 2009.
This article was written by Justine Turnbull, Partner and Kerryn Tredwell, Senior Associate, Sydney and Kate Jenkins, Partner, Natalie Gullifer, Partner and Natalie Spark, Solicitor, Melbourne.
More information
For more information regarding possible implications for your business, contact a member of the Employee Relations or Superannuation teams.