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Crackdown on share tax breaks in doubt

Crackdown on share tax breaks in doubt
by Alan Thornhill

The Federal government has stepped back from its budget crackdown on the tax breaks that come with employee share schemes.

That happened when the Assistant Treasurer, Chris Bowen, admitted that the government’s initial response had been clumsy.

He said it could - and would - be “better calibrated.”

The government had proposed, initially, to prevent people benefiting from these schemes defererring their tax liabilities.

It also declared that it would restrict a tax exemption of $1,000, for those who pay up front, to people earning less than $60,000 a year.

Mr Bowen told parliament late yesterday that these schemes had, in fact, become significant avenues for tax avoidance.

He said a Tax Office audit had shown that just two people had been able to avoid paying a combined tax debt of more than $1 million by using these tax breaks.

The Federal Treasury has estimated that the government would raise an extra $200 million in tax, over the next four years, as a result of the crackdown.

But a storm of protest, from both business and unions, followed the government’s announcement, on budget night.

That forced the Treasurer, Wayne Swan and Mr Bowen to issue a joint statement, earlier thia week, conceding that the government would take another look at the matter.

They also said then it would release a fresh “policy options” paper within a fortnight.

However Mr Bowen told parliament yesterday that most, but not all, of the people who had lodged protests on the issue, had admitted that the tax breaks did involve genuine problems with revenue leakage.

He said they must be fixed.

The ATO and the Treasury are both worried about the matter.

There are, essentially, two kinds of employee share ownership schemes.

These are the narrow ones, restricted to senior management and broad schemes, benefiting permanent employees, working both full and part time.

The two scoundrels, who each managed to avoid about $500,000 in tax, through these breaks, were both executives. Broad schemes simply don’t involve that kind of money.

That much, at least, is clear, even though Mr Bowen refused to name the miscreants, in parliament.

He said doing so would be improper, under the secrecy provisions of the Tax Act.

So what happens now?

Watch this space.

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Share tax breaks

Alan Thornhill's assessment of this issue is quite correct.

Many faster growing firms are strapped for capital, and see an employee share scheme as an inclusive way of providing incentive and giving reward to employees during this growth phase.

 To ask someone on a moderate salary to pay up front for an option that they may or may not excercise in the future is clearly unfair.  Often, they have been given shares or options as part of their remuneration, without too much choice in the matter.  If this scheme were to proceed, many employees would be forced to knock back package offers, and probably end up worse off.  This quite apart from the fact that share/option value is a ridiculously fluid figure!

As Jay Somasundaram says, the main difficulty with the tax system is complexity, spawning an army of public servants and an industry of tax schemers.  The dopey FBT was just pure envy, and added ludicrous amounts of work doing simple things like eating and parking.  The consumption tax is much fairer, as it is a tax on those who use resources, straight and transparent.  If this were the main tax vehicle, then large amounts of wealth should be addressed by a tax on large capital holdings.  This would be much more equitable than the dog's breakfast of envy taxes with "thresholds" and "exemptions", surrounding the main tax vehicle, that of income.  After all, it is the age of user pays.

Fiona: Welcome to Webdiary, Roderick.

Alice and the fat mandarins

The recent relevations about Weight Watchers memberships for public servants makes me wonder: Shouldn't there be an FBT liability? Is this a circumvention of standard pay scales for public servants? Isn't this discrimination against thin people?

Or perhaps I'm discriminating against public servants. They are under so much scrutiny, they can't afford to take risks and do something innovative.


Scoundrels, miscreants?

A bit strong, isn't it? The government provides many ways for people to pay less tax. The government deliberately creates them as an incentive to promote a behaviour it wants to encourage. Well known examples are:

  • pre-tax super contributions
  • salary sacrifice super
  • agricultural investment schemes
  • the recent 50% tax rebate

There are many more. Often, the individual is  taking a risk (forsaking money in hand for possibly more later). It is often not tax free, but moving the tax year from a year of plenty to a year of scarcity, or of paying when a benefit is realised (when there is money in the bank).

Definitely, complex tax law creates perverse incentives. There is a whole industry that lives off it (including a bigger ATO).

Let's not blame the individual who takes advantage of it - that is actually what the government wanted the person to do. The government seems to be playing games, getting political mileage demonising some incentives while promoting others.

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