The federal government announced changes to share ownership schemes in the budget, but appears to be backing down on them as a result of union pressure. http://www.abc.net.au/news/stories/2009/05/25/2579791.htm?section=business

It surprised me how many Australians seem to get the benefit of these schemes and I wondered how many on this forum would be affected by changes.

Klaas Woldring has been advocating them for years through articles on our site http://tinyurl.com/nym4fj but I had no idea how widespread they appear to be.

Apparently there is an element of tax deferral with these schemes, which seems to me to be entirely inappropriate no matter how large or small your income.

Of course, those of us who own businesses, as long as they are successful, often earn less regular income, but enjoy the tax deferred benefits of capital gains, which might be seen as inequitable by some.

Suggests to me that we're best off taxing income lightly and taxing spending more heavily, then the inducements to enter into schemes is much lower.

Graham, I think you may have missed the mark.

>>Apparently there is an element of tax deferral with these schemes<<

Under the original proposal, if I gave my employees options to buy shares in my company at a discount, they would be immediately liable to pay tax on that discount.

So let's assume I grant them options to buy 1,000 shares at $1.00 instead of their current price of $2.00, they would be immediately liable for tax on $1,000.

If the shares then tank, my employees have had no advantage from my share scheme, but instead have had the privilege of paying tax on money they haven't received.

Now, you may say "that's your fault for running a crappy company", but the new rules destroy the attraction of the option scheme in the first place. Negative cashflow immediately, for a benefit that may never materialise.

That's why there has been such a reaction. An active disincentive for me to give my employees a stake in the business.

But unfortunately, a typically short-sighted policy. Which is all you can expect from Canberra, where they haven't a clue how business is run.

GrahamY

Sorry mate this is another politically partisan dig. Last time I looked there are changes to be made.
The point was made the changes were to catch the OT behaviours (rorting?)of the executives. not the ordinary folk.
we both know that it will change to protect the worker's interests.

apart from which The previous post is right.

I would have been effected in the past but not now.

I agree with you GrahamY. Entirely inappropriate.

Pericles, the problem is more complex than you make out. There are two issues. Firstly, there is the problem you allude to, which is you don't want to have to pay the tax on the shares upfront. I have some sympathy for that. The ATO argues it creates an accounting nightmare though - and they are right. Perhaps the solution is for you to hold the shares in trust for the employees, and make you deduct and forward the outstanding tax when the employee sells them. That way the nightmare lies with you, who created the scheme. Seems reasonable to me.

The second problem is worse. After a certain period of time the taxable capital gain you get from selling the shares drops by 50%. If the employees sell after that period they have effectively 1/2'ed their taxable income. Probably the real issue here is the bias towards shares as an investment in the first place. Even though I benefit from it, it sounds like a tax break for the rich and wealthy to me.

If you are trying to get people at the lower end of society into the capitalist system and off welfare, you need to ensure every cent they earn ends up in their pocket. Those of us already earning far more than we could make from government handouts don't need those sorts of incentives. Yet the scheme as it was does just that. The richest people earn most of their income through stock options. And by taking advantage of this loophole they could reduce their effective tax rate to less than middle class Australians pay.

When its all said and done, someone screwed up the tax system. And it needs to be fixed. They are fixing it by making the system even more complex, as is usual, which is something I dislike. But it is better than doing nothing.

Sounds like a lot of complexity is involved to me.

While a bit off topic, why not raise the GST by 10% and use the extra windfall to forgo lots of other ad hoc, economically distortionary and inefficient taxes/charges/levies? Also take the opportunity to simplify taxation in general so that it follows a clear set of principles. This might mean scrubbing some taxes/charges/levies altogether, reforming others and introducing new ones (like an increase in the GST).

The only big losers will be those inside the system that can best exploit the current system of myriad legislation.

Shared ownership is a system to increse the wealth of the wealthy and to con the poor that they own a property.
The poor who live in these homes, paint and repair, while the real owners, Banks, Super funds and investors can trade these properties at will without revealing to the poor mug shared owner who is currently the owner.
Lets say the Southern China Triad Group or the Mafia Columbia Group.
When the time is right and they want the Mug shared owner to move out, they will force the rate up or make life rough on them.
The New Yorker's had a Shared ownership system for new immigrants.
In Australia, we had Vendor Terms,both systems allowed for the explotation of the poor.
Block Busting is the term used in the USA for getting people out of a residence.The owner would put a whore next door or smash your windows regularly.
Shared Ownership no thank you.

Not really, rstuart.

>>There are two issues. Firstly, there is the problem you allude to, which is you don't want to have to pay the tax on the shares upfront... The second problem is worse. After a certain period of time the taxable capital gain you get from selling the shares drops by 50%.<<

The first issue is simply the concept of paying tax on money that you may or may not earn in the future, and having no recourse to get that tax back if you don't earn that money.

That is quite simply theft.

I don't see the merit in the company indulging in fancy avoidance tactics either. The company would bear the whole cost if the taxman changed the rules. Which happens, let's face it.

The second is merely an existing tax ruling. It could also change at the drop of a hat.

But there must have been a reason behind it, when it was originally implemented.

What was that reason, do you think?

Pericles: "That is quite simply theft."

Well yes. I guess the best that could be said for it is know the money is going to get stolen, so it is your choice. I don't think the decision they made was the best way to handle the problem, just that it was better than doing nothing.

Pericles: "I don't see the merit in the company indulging in fancy avoidance tactics either."

The whole point of PAYG is to lower tax avoidance, and lower the cost of tax collection. It works. You apparently see some advantage in wage payment scheme that undermines PAYG by deferring some of the tax until later, so it is no longer PAYG. That's fair enough. But since employer gets the advantage, so I don't why they should not be lumbered with whatever additional costs the introduced complexity entails. It is just a case of user pays. I don't want the cost of my portion of the ATO budget to go up just because you have introduced some fancy remuneration scheme.

Pericles: "What was that reason, do you think?"

Buggered if I know, Pericles. When you ask questions like this, you always seem to have an answer in mind. What is it?

Just a random point though. They obviously wanted to divert investment into the share market, away from things like housing. We now have vacancy rates at a very unhealthy 1.5% in times of record low interest rates. Not a good look.

I guess that depends what you see as being the "problem", rstuart.

>>I don't think the decision they made was the best way to handle the problem, just that it was better than doing nothing.<<

If the perceived problem was that some rich folk were using share options as a tax avoidance mechanism, then I absolutely disagree that it was "better than doing nothing".

But you do seem to have an odd view of the whole scheme.

>>You apparently see some advantage in wage payment scheme that undermines PAYG by deferring some of the tax until later,<<

For one thing, the provision of share options is in no way a direct alternative to salary.

For another, there is no "deferring" involved, if no value has been transferred (from the company), and you are unable to access the consideration upon which you are being taxed.

>>But since employer gets the advantage, so I don't why they should not be lumbered with whatever additional costs<<

Eh? What advantage might that be? The schemes are designed as a longterm benefit for the employee, with the value of that benefit tied to the success of the company they work for.

>>When you ask questions like this, you always seem to have an answer in mind<<

I have an opinion. I was somewhat interested in yours.

But since you seem to classify the whole process as a plot by greedy capitalists to divert money from your pocket into theirs, I withdraw my question.

Perciles: "The schemes are designed as a longterm benefit for the employee."

My turn to say eh? Look, if you are doing it purely for my long term benefit, how about you just give me the cash. If I agree it is in my best interests, I will use it to purchase the shares/options in my employer myself. From the employers point of view giving cash is much simpler and cheaper than trading shares. So why would an employer choose to remunerate in shares, I wonder? (My turn to ask a rhetorical.)

Perciles: "For another, there is no "deferring" involved, if no value has been transferred (from the company), ..."

You have got me totally confused. If "no value has been transferred from the company" (to the employee you mean?) then presumably the employee paid full price for the shares. Ergo there is no tax liability.

Perciles: "... and you are unable to access the consideration upon which you are being taxed."

More confusion. Apart from selling the shares or options on the open market immediately, you mean?

From what I can tell, you are saying the tax on these two transactions should be handled differently:

(a) The company gives $X to the employee, on the condition he buys shares in the company.
(b) The company pays $X on a batch of shares, and gives them to the employee.

In the first case you are happy for the tax on the $X to be paid immediately. In the second you want to:

(a) defer the tax on $X, and
(b) make more work for the tax office by having them collect the tax off the employee rather than their employer, and
(c) if the employee aligns his interests with the companies share price by holding on to his shares for a while, enjoy a 50% tax break.

In fact I bet that last bit is the answer to your rhetorical earlier. And you expect me (who is now mostly a PAYG tax payer and has to fund this 50%) to be happy with this cosy arrangement? Geezzzz.