A parliamentary bill that changes the way executives pay tax on incentive schemes contains a number of problems, according to a leading tax lawyer.
The bill requires executives to pay tax upfront on shares and rights that they receive as incentives, as opposed to having the option of deferring the payment unless certain conditions are met. The wording of the bill says that the payment can be deferred where there is a real risk of forfeiture and under certain salary sacrifice agreements.
Hall & Wilcox partner Mark Payne said it is the former that causes the problems. “The real issue under the ‘real risk of forfeiture’ is what that new term actually means, and how some of the new terminology in the legislation is actually going to work,” he said. “There are a number of uncertainties under some of the technical terms.”
The bill provides no real explanation of what would constitute a ‘real risk of forfeiture’ other than providing a range of examples, which do not provide enough clarification. “They’re not very helpful examples in the end about when something would be at real risk and when it wouldn’t,” Payne said.
Another problem is that it appears the legislators have largely ignored submissions concerning the language of the bill. A Productivity Report recommended that executives not be taxed when they cease employment, to encourage an alignment with long-term incentives. “The bill ignores that and continues to tax executives and all employees when they cease employment notwithstanding that they may not be able to exercise the right to sell that share at that time,” Payne said.
A pressing issue is that the bill is retrospective, and would apply from July of this year. “For new and existing clients they are going to need to know how they can structure these plans going forward, and how they can do it in a way that creates certainty,” Payne said. “They want to get the right tax outcome because there’s not a lot of incentive for giving [executives] shares or rights that have a whole bunch of conditions attached to them.”
Payne said that if the tax legislation passed in its current form “you’ll pretty much disenfranchise your entire workforce.” However, Payne believed there is likely to be a significant amount of work done before the final rules are enacted.
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